The (Semantic) Problem with MMT: An Exercise in Framing

My wife is no longer speaking to me. She got angry—hysterically angry—over MMT. This caught me off guard. I could not understand it. She was on the verge of throwing her wine glass across the patio. She banged the glass table where we sat with her fist, which alarmed me. This began as a quiet, after-dinner conversation pursuing her casual inquiry about how my Monopolis Monopoly Post had been received.

Some background: my wife runs our twelve person architecture business. She works ten-hour days and most weekends—both Saturday and Sunday. She manages most of the clients and projects in the office and the bookkeeper. She reviews the timesheets, manages the billing, negotiates with clients who are past due in their payments, signs the paychecks, signs the payroll tax checks, the income tax withholding checks etc. She meets quarterly with our tax accountant to strategize to make sure we’ll have enough cash to pay taxes and retirement account obligations every spring. She is driven to do all this by a type A personality that has to be in control of everything around her, and she does it better than most people could ever imagine it could be done.

My rambling MMT explanation started to get under her skin when I began talking about how the government didn’t really need her tax dollars to fund any of its expenses—how, in fact, if she paid her taxes with dollar bills, the government would actually shred the paper and throw it away. That’s when she banged her fist on the glass table. That was not acceptable, she insisted. There had to be some kind of “equivalency”. If she worked as hard as she does, and every month is forced to pay over a third of the money she collects to the tax-man, then there had to be some good reason for it. It had to go to some good purpose, and it had to be spent wisely to achieve that purpose.

I just woke up in the middle of night (3:30 AM) realizing that my wife’s sudden anger explains a lot of mysterious things, and poses a special problem that MMT has to figure out how to solve. The mystery it explains is why the mainstream media and politicians insist on believing and behaving as if tax dollars pay for federal expenditures—and why, as a result, mainstream economists and pundits (who actually have an inkling about how the money system works) are so tied up in knots trying to explain the economy to us. It appears we are ALL engaged in a massive cultural self-deception. The deception “explains” and gives meaning to something we’re required to do every month that’s very painful: pay taxes. The story we’re telling ourselves to alleviate this psychological pain —that our taxes pay for federal spending—is rooted in what I have referred to as Neandertal (or gold-standard) Economics.

It is clear this story continues to provide the underpinning for virtually all our political dialog: Tax dollars pay for federal expenditures. Therefore: let’s debate (a) how much should those taxes be, and (b) what they should be spent on. In a nutshell, that’s the story of our discourse. The problem MMT has is that while it can demonstrate that this story no longer explains reality, MMT has not provided a compelling substitute for this narrative. We still have to pay taxes. The government still spends money on things. So we’re still arguing the same two points, except now the relationship between these two things has changed in a way that seems to make the dialog meaningless.

How, pray tell, are you supposed to debate what the tax rate should be when none of that money is actually needed to pay for anything? And on what basis do you debate sovereign spending when it appears the sovereign can spend at will for anything and everything it might need? Within this new reality, how is a person supposed to make sense out of paying taxes? What story alleviates the pain? I don’t think it’s enough to simply say that taxes have to be paid or the fiat currency will lose its value. Nor is it really compelling to say: “Your tax dollars are fighting inflation! You can feel good about that.” While these stories may explain what is actually happening, they are not compelling enough to replace the old one: “Taxes pay for federal expenditures.” Even if no longer true, this story still makes a lot more sense to the human psyche (and to my wife). That’s the special problem I think MMT has to figure out how to solve.

The interesting thing here is that it appears the way modern money actually functions today is extraordinarily beneficial to everyone! It occurs to me that the first sovereign country that politically understands this, and is able to align its fiscal policies accordingly, will become so wealthy and prosperous it will rapidly dominate all other economies. It will be able to have the finest, most advanced medical and health services industry, the most efficient and convenient transportation system available, the most beautiful and comfortable housing imaginable, the healthiest and tastiest foods that can be grown and prepared, the most effective education and school systems, the best and most stylish shoes and apparel, the healthiest and most diverse natural ecosystems, and the most leisure time—including the most wonderful, fun, and satisfying places and ways to spend it. What politician, in her right mind, couldn’t get behind that? What voter, in his right mind, wouldn’t vote for it? And how could a platform of sour-faced austerity even begin to compete?

Here’s a first try at a new way of framing the tax problem:

Let’s all agree that we have to pay federal taxes NOT because that money is going to be used to pay for federal expenditures, but because the tax collections are specifically going to be used to create a “fiscal space” that is essential for the effective use of our sovereign currency. It is within this “fiscal space” that we are able to issue currency to buy the things and services we decide that we need, but that the private market, left to its own profit motive, is not going to create (or is not going to create enough of). Examples of such things are: military defense, pre-K through 12 and community college systems, public transit, smart-grid electrical transmission, highway and bridge repairs, universal health care, etc. Without the “fiscal space” created by our tax dollars, expenditures made to buy these public goods and services would cause inflation to accelerate, devaluing the currency and damaging the economy for everyone.

To take full advantage of the opportunities our sovereign currency gives us to employ ourselves to create the things we really need, it is therefore essential that we create the “fiscal space” to do so by paying federal taxes on a regular basis.

This new frame leaves us free to debate (a) how large the “fiscal space” needs to be to keep inflation in check, (b) what specific things and services our public expenditures should be directed toward, and (c) what is the relationship between the two. Please note that this debate is quite different from the one that focuses on whether we can afford to build the things we need and have the services we require.

What is especially important to recognize here is that in agreeing to this new narrative, we are not changing anything about the way the government already taxes and spends. The only thing we are doing differently is giving ourselves permission to spend—without guilt or fear—that which we intrinsically have an unlimited supply of: our sovereign currency. The fact that we have an unlimited supply of this “special stuff” doesn’t mean we can spend it haphazardly, without attention to the consequences. If anything, it means we have to pay even more attention to the consequences. The agrarian philosopher, Wendell Berry, made this point very well when he pointed out that a man with a mule can plow to his heart’s content and never do a moment’s damage to the earth; a man with a tractor, on the other hand, can destroy the productivity of his land in a single year.

J.D. ALT 5-22-12
John is a writer-architect. His novel, The Architect Who Couldn’t Sing, is available at Amazon.com or iBooks.

150 Responses to The (Semantic) Problem with MMT: An Exercise in Framing

Taxes function to create a “fiscal space” is an interesting way to say it. Somewhat different than Mr. Mosler who says that taxes function to regulate aggregate demand. Regarding the framing of the new debate, I think there is a third component in addition to HOW large the fiscal space and WHAT sort of spending. Even if everyone understood MMT, there would still be the age old question regarding WHO pays the taxes, or most of the taxes. It seems that this is the question that is really troubling your wife.

You’re absolutely right that “there would still be the age old question regarding WHO pays the taxes, or most of the taxes.” I think the best way to answer is by saying, “Taxes are a drag on the economy, but they are especially a drag when imposed on the middle class. Therefore, the tax burden should primarily be borne by people whose spending will not be dramatically reduced by a tax increase. These people are known as the one percent.”

Is it not the position of Mosler/MMT that there should be zero taxes, until unacceptable levels of inflation surface? At which time, taxes are instituted, and not just upon the 1% “whose spending will not be radically reduced”, but upon the other 99%, too, whose spending could be radically reduced and, therefore, inflation controlled.

Mosler also discusses ‘fiscal space’ in EXACTLY the way indicated here … it is in his little book ‘Seven …’. Seems to get lost in MMT often that there is a relation between spending and taxes, or a big problem will result.

As I understand MMT’s position, taxes are used to reduce demand, which reduces inflation. I’ve never seen MMT state that we should not have federal taxes until inflation arises. I once said to Warren that we should eliminate the federal income tax and he said doing so would cause inflation if done abruptly.

Readers shouldn’t miss your point, Ramanan, because it is exactly right: Tax moneys are not in fact destroyed, rather they are collected by being deposited into the Treasury’s account at the Fed. The money is not merely deleted out of the tax payer’s account; there is a corresponding deposit in the Treasury’s account.

We shouldn’t conflate “Taxes are money destruction” with “Taxes could be money destruction given the Federal government doesn’t need other people’s money”. If the Federal government began deleting money out of people’s accounts without a corresponding, proportionate rise in their account at the Fed, then we could regard taxes as money destruction. Until then, they’re collected, deposited, and spent.

I think some of the MMT gang got a bit ahead of themselves with the theoretical aspects of MMT, i.e. imputing to reality how taxes could function and how they could be regarded, when in fact the depiction is not representative. Theoretically sound, sure, but not descriptive.

No, the MMT description is entirely accurate & descriptive of current reality. Monies collected certainly are “destroyed” , canceled, aufgehoben in German. The money is the immaterial debt owed by the government to the taxpayer; the tax liability is the reverse. They cancel each other out. End of the story.

The Treasury could credit its account by twice as much as the taxes collected. And as you say, it could not credit its account at all (& default when the account is drained & wreck the economy). The crediting is a separate operation entirely independent of the destruction of the tax monies, as you even seem to recognize, just like matching bonds 1-1 with spending is entirely optional & independent of spending. Just because there is a law that can make it look like taxes or bonds pay for spending doesn’t make it so.

It’s like Lincoln’s old story about “How many legs would a dog have if you called a tail a leg?” To the answer 5, he replied, no 4 – calling a tail a leg doesn’t make it one. MMT does it right, like Honest Abe, and isn’t fooled by the answer 5. The whole system is devoted to calling a tail a leg, with the utterly wrong commodity theory of money embedded in the description of the operations, to make it look like taxes pay for spending. But it doesn’t work like that, it can’t work like that, it never worked like that. Mitchell-Innes makes the same observation in his papers to not look at what the government says or thinks it does, but to look at what it does.

Several months back, I called the Treasury to ask them this very question. The person I spoke with initially indicated I would receive a call back, which I did, from two individuals–a man and a woman on a conference call (I believe I still have the gentleman’s name and contact info kicking around). They took my call rather seriously. They were concerned I was the media (not because they have something to hide, but because media interviews need to go through proper channels), although I made clear I was not. I remember receiving the call back as I was standing in the parking lot of Whole Foods about to go inside to grab lunch. The three of us spoke for about five or ten minutes, during which time I asked them, “What happens to the tax money you collect? Does the Treasury/IRS just delete it out of people’s accounts, or does it transfer the money from the tax payer’s commercial bank to the Treasury’s account at the Fed? Is there a corresponding deposit to the withdrawal?” They were quite clear the money is not destroyed, it is transferred from the non-government sector back to the government.

Perhaps the Treasury doesn’t know what it is in fact doing. However, I have never seen a shred of evidence suggesting the money is merely deleted out of the tax payer’s account. Show me there is only a reduction in the tax payer’s account with no corresponding deposit into any government account. From what I’ve seen, quite the opposite is true, as just detailed. Now to be clear, we are not talking about what the Treasury could do, we are talking about what they are doing. I already made the point that some MMTers conflate “could” with “are”. We agree they could do exactly what MMT suggests, it’s just not occuring currently.

The Treasury is a currency issuer which behaves currently a lot like a user. The tax moneys it collects go right into its account before they spend it back into the economy.

And tax moneys can fund government operations. So can bonds. Granted the government created the money to begin with, granted they created the money ex nihilo and spent it into the economy before they could tax or borrow it back, but this hardly implies money transfers are intrinsically impossible between the non-government and government sectors. There was the initial creative event (keystrokes or printing/minting) followed by government spending (a transfer of read goods for financial assets) followed by a transfer of financial assets back to the government sector. Taxes, bonds, fees, etc. are all transfers of money back to the government, which created it. Not only are transfers possible, that’s in fact how things currently operate.

The irony is, nothing I’m writing is really inconsistent with the theoretical aspects of MMT. My “criticism” is really largely academic, focusing on what I believe to be the overzealous imputation of how things could operate to how they are operating. The Treasury could simply delete the money out of people’s accounts with no corresponding deposit into its own account(s). It could simply keystroke money into existence and not waste time collecting previously created money. However, all the evidence I have seen suggests this isn’t occurring currently.

See for example the Treasury’s monthly Receipts and Outlays statement:

The point about shredding goes on to prove the point raised in the main post.

The person who collects taxes doesn’t shred the money I guess even if the notes are unfit. I would imagine it needs to be sent to the Federal Reserve who will decide this. There needs to be an accountability. If the person collecting taxes has the power to shred every immoral person would want the job because the person can easily cheat by saying he collected taxes from his friend/briber and destroyed them etc.

But MMTers would say, as soon as the tax payer leaves the room, the currency notes are shredded – without specifying!

Great story about you having contacted the Treasury!

Here’s a more general scenario. A lot of taxes are paid to TTL depositories. If they are paid in cash, the bank would add them to its inventory of cash and credit the Treasuries account. When the Treasury needs to spend it will transfer these funds to TGA. No notes are destroyed in the process. The notes don’t even reach the Treasury/Fed.

A bank may receive a lot of misfit notes but these can be due to other payments as well. It will send them to the Fed which will destroy them. This has nothing to do with taxes.

Some Post Keynesian textbooks in the 80s had such phrases – taxes destroy money and this was more conceptual – a modelspeak. MMTers try to argue such thing as if it actually happens in practice.

The whole “is the money actually, physically destroyed” is kind of an ironic argument given the “semantic” issue the author here raised. Taxes do destroy money in an effective sense, not necessarily in a physical one (although that happens too). It’s semantics.

Tax revenue is deposited by the Treasury in a commercial bank (many banks, actually) in what is call a Treasury Tax and Loan account, or TT&L account for short. All spending, however, is done through issuing treasuries at the Fed. To “pay” for the spending, Treasury uses the TT&L funds to “pay” the Fed. The “payment” from the Treasury to the Fed to “service the debt” is listed on the Fed’s income statement as revenue, which is (of course) where they derive their profit.

Now here’s the kicker – Guess where all Fed profits go at the end of the fiscal year? That’s right, they are returned to the Treasury as per law (contrary to what the conspiracy nuts would have you believe, the government controls the Fed at the end of the day…Bernanke doesn’t head some secret Illuminati cabal). So what happened? Basically, the government put some money in the economy via treasuries (a.k.a. “created” money), and it also took some money out of the economy via taxes (a.k.a. “destroyed” money). Yes they created more money than they destroyed (via a “deficit” financed with treasuries), but they could’ve just issued the same amount of treasuries less the anticipated tax revenue, and then just decided to not tax anyone. The end result is the same amount of money in the system.

When you hear an MMTist say “taxes destroy money”, they mostly only mean it in an effective sense. Treasuries increase the money supply (“create” money), and taxes decrease the money supply (“destroy” money). It’s semantics.

I think the language of money creation and destruction in relation to fiscal policy can loosely be regarded as semantics/inconsequential academics, but MMTers I believe make a pedagogical error in leading with that language, because i) as a description, it generally isn’t accurate and ii) it therefore needlessly confuses people. Conflating “could be regarded as (with some changes)” with “is”, is counterproductive when elucidating the theory to newcomers. I think the solution is simple, and that is to make a better distinction between an ideal fiat system (or at least how a fiat system could be set up) and the fiat system we have as it currently operates.

The money destruction/creation insight, however, is not to be diminished, only detached from how things actually operate. In the overall scheme of things, the insight is an important one.

Thanks for the links, but they don’t really help because they don’t acknowledge the fact that government doesn’t have a balance in an effective sense. Even in the first sentence of the first link, they are still parroting the old gold standard-era “Treasury ‘balance'” myth. There is similar logic in the second link.

The Treasury “has” an unlimited amount of money. Operationally, banks may say the Treasury has a balance via the up and down changing of accounting notations on a balance sheet, but the Treasury has the unique power to “un-balance” the balance sheet, if you will. They can literally change their stated “balance” at will.

As I said in my last comment, yes taxes are sent to a Treasury account in an operational sense, but because “infinity plus one” still equals “infinity” (something that can only happen in a government account), taxes are effectively destroyed. Accounting notations have effect on government accounts, operationally or effectively. (Operationally, it’s the people, not the economics constraints, that are causing a “balance” constraint on government accounts.)

(In operations, tax destruction also happens because spending only occurs via treasuries. Treasury just issues treasuries to offset the amount of tax revenue every year. The Fed then prints new money and sends it to Treasury in exchange for treasuries, then they destroy worn out bills. Taxes are destroyed both physically – if you paid with cash – and information wise – if you paid via account debit. Tax destruction is not up for debate in MMT.)

The whole reason for taxes in MMT is to regulate aggregate demand. Simply put, they guard against too much inflation/deflation. If there is too much money in the money supply, MMT argues that the government should reduce the money supply via taxation. If there is too little money in money supply, MMT argues that the money supply should be increased via treasuries.

That is what’s already happening in an effective sense. MMTists are just trying to get people to understand that.

The description is accurate. I want to be clear on that. Money is “destroyed.” Remember, money is just information.

But I do agree that the current simplification may not be working. As I said in my other comment further below, JD has found MMT’s only problem – communication. It’s a problem that I’ve highlighted before on RMM’s blog. MMT has done well in convincing the laymen exactly because it simplifies things economists talk about so esoterically. Terms like “outlays” and “aggregate demand” only serve to confuse the well-intentioned laymen. “Taxes destroy money” is attention-grabbing, easy to understand semantically, and accurate.

However, convincing laymen doesn’t translate into convincing policymakers. We either need to reshape our words or reshape our communications channels (or both). I suggest a few things:

– Stop calling it “MMT.” In economics, once you get a label, you get grouped with the other opinion-driven economics like “Keynesianism, Monetarism, the Austrian School,” etc. Just call it “economics.” No label = No prejudice.

– Explain everything from a personal finance/household standpoint (like Mosler does in his book), and only say that the governments finances are different (and how). This personalizes everything. Higher personalization = Higher retention among listeners.

– Stop taking so long to explain everything. I rarely see a blog that has 1) short explanations, 2) good organization, 3) easy-to-understand terms. Mosler’s website directs you to a laundry list of reading material and still uses esoteric terms. RMM’s blog has entries that are too long. Many others use the same esoteric terms.

– Take smart political action. Another commenter here mentioned calling the Treasury department. It was a valiant effort, but bureaucrats aren’t paid to think, so I think it was a wasted call. Equally, calling your elected officials and droning on about MMT will just convince them that “opinions are like a**holes. Everybody has one and it usually stinks.” However, if the same commenter would’ve called his congressman and Senators offices, gave them the same questions, and had them perform a congressional inquiry to said department for the answers, I think he’d have gotten a better result. Use constituent services as a way to assign Congress homework. Get the answers on their paperwork, not just the letters you send or the phone calls you make.

Nathan, if you add the set of money held by the non-government (non-government money, NGM) to the set of money not held by the government (government money, GM), if you aggregate all the money in existence, when taxes are paid, this aggregate set of money (total money, TM) does not decrease. No money passes out of existence, is deleted, or, to use MMT lingo, is destroyed. Rather:

Nathan, if you add the set of money held by the non-government (non-government money, NGM) to the set of money held by the government (government money, GM), if you aggregate all the money in existence, when taxes are paid, this aggregate set of money (total money, TM) does not decrease. No money passes out of existence, is deleted, or, to use MMT lingo, is destroyed. Rather:

NGM + GM = TM

(NGM – T) + (GM + T) = TM

Where “T” is taxes.

Where’s my error?

Sorry for the nearly duplicate comment. There was a “not” needing deletion. This is the corrected statement.

Like I said, I would explain it the way Warren Mosler did in his book. I think he broke it down into simple terms intentionally. He used a lot of lay terms in there. The book was a very easy read (although many times, his website is another matter). That and I would shorten it as much as possible (Warren’s book could’ve been 20 pages maximum and still got the important stuff across).

Taxes are not in the equation twice because taxes are not operationally involved in spending (“GM + T” does not exist). Specifically, “+T” does not exist. Treasuries are the only way money is added to the system. At the end of the day, taxes are permanently sent to the Treasury, never to return to circulation. It should’ve looked like this:

(NGM – Tx) + (GM + Tr) = TM

Where –

Tx = taxes
Tr = treasuries

and –

If Tr > Tx, then “deficit”,
If Tr < Tx, then "surplus",
If Tr = Tx, then no change in TM,
f(Tx) =/= f(Tr).

(Although, keep in mind that even the above isn't completely accurate as it doesn't factor in every operational fact about the monetary system.)

I had no idea you already read it. If I may make a suggestion – skip the sections where Warren is telling stories about the past and focus on the operation aspects he’s talking about. Pay particular attention to the part where he uses the household currency analogy and the big department store analogy. They helped me to understand it better.

Nathan I understand basics of MMT I just can’t explain them to others seemed as if it was the same problem JD Alt was referring to with his wife. We need to be able to explainit to people with ninth grade education because that unfortunately is where the US is at.

“GS + T” is an empirically verified fact, Nathan. I can’t think of many propositions which would have more available evidence to confirm that it’s true. Kelton’s paper, for example, describes this “GS + T” process in detail. The GS currently credits one of its own accounts by the exact amount debited from an NGS account when settling a tax liability. This is the nature of a money transfer. It isn’t a coincidence NGS accounts decrease by a proportionate amount to the GS account increase. Taxes aren’t the only reason GS accounts increase, but it is one empirically verified reason.

Perhaps more problematic with your position than the empirical evidence is the following: There is an inconsistency between regarding “GS + T” a false proposition while regarding taxes as payments to the GS in settlement of GS imposed tax liability a true proposition. The former follows from the latter, and the latter is foundational to MMT.

Maybe you are reading the research wrong (I don’t know what “GS + T” is. Wrong letter, maybe? We were talking about “GM”.), or maybe you misunderstood it, but anybody telling you that federal taxes are put back into circulation is lying to you (regardless of who publishes it, even Kelton). It’s either that or you are misunderstanding the research. Are you sure you’re talking about federal withholding taxes (like FICA) and not consumption taxes (like sales tax)? Those are two different things.

I told you exactly what happens to federal taxes. They are:

1) paid to the Treasury by citizens,
2) deposited in TT&L accounts by the Treasury,
3) “paid” by the Treasury to the Fed to “service the debt”, and then
4) returned to the Treasury by the Fed as per law.

And the only way money is added to the system by the government is through treasuries. Again, this is an operational fact.

“The Treasury tax and loan account system was designed as a mechanism for minimizing the dislocations on bank reserves and the money market arising out of the sizable and irregular transfers between the Government and the public.”
Treasury tax and loan accounts and Federal Reserve open market operationshttp://www.newyorkfed.org/research/quarterly_review/1978v3/v3n2article7.pdf

In fact, the more I read your previous comment, the more inclined I am to think you have no operational knowledge of MMT or our monetary system (forgive me for saying, it’s either that or you didn’t read/understand what I was saying). Let’s go through you comment step by step:

“’GS + T’ is an empirically verified fact, Nathan. I can’t think of many propositions which would have more available evidence to confirm that it’s true. ”

Nope, but we’ll get to this in detail below…

(Also, I’m assuming you meant “GM”.)

“Kelton’s paper, for example, describes this “GS + T” process in detail. The GS currently credits one of its own accounts by the exact amount debited from an NGS account when settling a tax liability.”

As I said. Tax revenue is taken out of a private account and deposited into a public TT&L account.

“This is the nature of a money transfer. It isn’t a coincidence NGS accounts decrease by a proportionate amount to the GS account increase.”

Again, as I said. I never said anything to the contrary.

“Taxes aren’t the only reason GS accounts increase, but it is one empirically verified reason.”

This is where your mistake is, and for two reasons.

1) We’re not talking about how taxes relate to an account, where talking about how taxes relate to the money supply, and

2) Effectively, government accounts neither “have” nor “don’t have” money. From an operational, accounting perspective they say they do, but from an effective perspective, they can’t. That is the equivalent of saying the government can only have a set amount of money, something that is the complete antithesis of MMT (and flat out wrong). The government only “creates” or “destroys” money, it doesn’t “have” it.

A government account at a commercial bank can say whatever it wants. It doesn’t matter because the government can change it at will. When it comes to accounting notations on government accounts, they are literally irrelevant. When were talking about the government’s money supply, “infinity plus one” still equals “infinity.” The “plus one” is irrelevant. Same with “infinity minus one.”

The up and down movements of accounting notations have no bearing on government. This is a core principle of MMT and, forgive me for saying, I’m surprised you haven’t grasped it yet.

“Perhaps more problematic with your position than the empirical evidence is the following: There is an inconsistency between regarding “GS + T” a false proposition while regarding taxes as payments to the GS in settlement of GS imposed tax liability a true proposition.”

There is no inconsistency whatsoever because one is operational (taxes are indeed paid for tax liability) and the other is effective (taxes are not needed for government accounts, they are needed to regulate aggregate demand).

The former follows from the latter, and the latter is foundational to MMT.”

The “latter” is not “foundational to MMT.” The only foundational thing to MMT about taxes are the need to regulate aggregate demand, not settle tax liability. That’s what taxes do. It’s right there on Mosler’s site in red letters.

Your value judgments on what you regard my level of knowledge and understanding to be of MMT or of any other subject for that matter are entirely irrelevant. Let’s agree to focus on evaluating the validity of the arguments as well as the truth value of the propositions under consideration.

Below, I’ve responded to your remarks point by point in a similar fashion as you. I’ve concentrated my attention on those points I’ve deemed are of the greatest importance, which will, I believe, demonstrate your arguments are unsound and your description of the monetary system mistaken. If there is something you feel I left out you would like me to address, let me know.

With that written:

I told you exactly what happens to federal taxes.

They are:

1) paid to the Treasury by citizens,
2) deposited in TT&L accounts by the Treasury,
3) “paid” by the Treasury to the Fed to “service the debt”, and then
4) returned to the Treasury by the Fed as per law.

Your description of operations is rather ironic. Step one and two are equivalent to the mathematical expressions “NGS/NGM – T” and “GM/GS + T”, the second of which you are disputing. Your step one is the withdrawal; non-government sector (NGS) accounts are debited by an amount “T” such that non-government money (NGM) decreases by “T”. Again, mathematically this expression is “NGM/NGS – T”. Your second step is the deposit of “T” into government sector (GS) accounts wherein government money (GM) increases by “T”. Mathematically this expression is “GS/GM + T”. It’s not terribly consistent for you to reject the mathematical representation of the english statement.

Secondly, your description of operations fails to illuminate some of the material facts. Most glaringly absent from the above is any mention of what the Treasury does with the money the Fed returns to it in step 4. The money is sent back to the Treasury, and then what? What’s step 5? I don’t suppose the Treasury does exactly what I’ve been suggesting, i.e. spends it?

If in step 3 “service the debt” means “pay the interest the Treasury owes the Fed on treasury bonds the Fed holds,” you’ve only accounted for a small fraction of tax revenues. Interest paid to the Fed over recent years has been approaching 100 billion annually; tax receipts are well over 2 trillion annually. 100 billion is less than 5% of tax receipts. What does the government sector (GS) do with the fairly sizable remainder? It must do something with the money given it was deposited into its own accounts. I don’t suppose it spends it?

Fortunately we don’t have to speculate. The government has told us what it does with the remaining tax revenue, and *gasp* amongst other things it does spend it. As a currency issuer, the U.S. government is also a currency recycler, which is to say it reuses money it has previously created via fiscal operations.

What’s so strange about this conversation is; nothing I’ve written is inconsistent with the substance of MMT. My concern is for an accurate description of the existing fiat system so the problem JD experienced with his wife can be avoided at a broader scale. Stop framing the discussion incorrectly, and in doing so you will not sacrifice anything substantively in MMT, and you will not set a hurdle in front of your message.

As I said. Tax revenue is taken out of a private account and deposited into a public TT&L account.

“This is the nature of a money transfer. It isn’t a coincidence NGS accounts decrease by a proportionate amount to the GS account increase.”

Again, as I said. I never said anything to the contrary.

Yours is a good example of the conflating double speak I was referring to in my original post. It is important we keep in mind that what we are ultimately concerned with in this conversation is identifying the actual fiat system that exists and describing it accurately. On the one hand you claim it is descriptively accurate to affirm taxes are withdrawn from NGS accounts and deposited into Federal government owned TT&L accounts, which by definition involves a transfer of assets from the NGS to the GS, and yet on the other hand you (or at least other MMTers) claim it is also accurate to describe this withdrawal from NGS accounts as money passing out of existence. No, the money still exists because it has been deposited into the GS accounts, as you yourself just acknowledged. After all, if the money was destroyed, how could it be used to service the debt the Treasury owes the Fed as you claimed? Be consistent.

“Taxes aren’t the only reason GS accounts increase, but it is one empirically verified reason.”

This is where your mistake is, and for two reasons.

1) We’re not talking about how taxes relate to an account, where [sic] talking about how taxes relate to the money supply

No, we were not talking about what happens to the money supply when “T” is subtracted… We agree the money supply decreases. Now, let’s move away from the red herring and return to what we were talking about, and what we were talking about was whether it is descriptively accurate to claim GS accounts increase by an equivalent amount to the NGS decrease, from which one can infer the money was not destroyed, it was transferred. In other words, we were evaluating whether GM/GS + T is true or not. You’ve claimed it is false. I’m telling you it is an empirically verified fact which is evidenced by the money transfers from NGS accounts to GS accounts in equivalent amounts, the former decreasing by “T” and the latter increasing by “T”. As noted above, what’s interesting is you actually happen to agree with this description empirically (or what you’re calling “operationally”), but then you have this irrational abhorence to anyone actually saying “T” is added to government accounts because that means “T” funds spending, and god forbid, we can’t have that! We can’t have currency issuers recycling the money they created!! Heresy!!!!!

See, you and other MMTers stumble when you claim the transfer of assets from the NGS to the GS is money destruction. No money is deleted or otherwise passes out of existence. That is an observable fact. “But we mean money is destroyed in an effective sense.” Your so called “effective sense” is garbage philosophy. What you’re really doing is conflating a description of a hypothetical fiat system that could exist with the description of the fiat system that actually exists. Money could be destroyed as “T” is substracted from the NGS, but that isn’t what happens currently. You need to better differentiate between what is and what could be. MMT should be better about this in general. In failing to make the distinction explicit, MMTers only set a hurdle in front of acceptance of their theses, as evidenced again by JD’s article.

2) Effectively, government accounts neither “have” nor “don’t have” money. From an operational, accounting perspective they say they do, but from an effective perspective, they can’t.

Nathan, all we are concerned with is an accurate description of reality, and it is in fact accurate to say the U.S. fiat system does in fact have some finite set of money. Could they issue more? Sure. Could they shift an 8 ninety degrees and have an infinite amount in their account? Sure, why not? But we aren’t concerned in this conversation with what could be, we are concerned with what is. Again, you’re conflating a purely theoretical fiat system (perhaps the “purest” version of a fiat system) with the real one–you’re conflating “could be” with “is”–which again is what I’ve been saying since before you joined this conversation.

That is the equivalent of saying the government can only have a set amount of money, something that is the complete antithesis of MMT (and flat out wrong).

It does not follow in any sense that if the currency issuer has a finite set of money, it can only have that finite set of money. The issuer can change the set of money that exists to whatever it wants that set to be. That is what it means to be an issuer. This sloppy distinction between “effective” and “operational” is obfuscatory nonsense.

The government only “creates” or “destroys” money, it doesn’t “have” it.

As a description of our fiat system, it is an empirically verified fact the Federal government possesses a set of money which increases and decreases relative to fiscal operations. The government only has some percentage of the set of money it has created, and that set is currently finite. It is limited by its own choice. That doesn’t mean the issuer can’t change the set through actual money creative and destructive events, it’s just an empirical fact. You could accept the empirical fact as the fact that it is if you would no longer conflate your hypothetical fiat system that could exist with the one that does exist and disposed of this “effective” language which only obfuscates what’s at issue.

A government account at a commercial bank can say whatever it wants. It doesn’t matter because the government can change it at will.

As a description of reality, of course it matters. That’s the issue.

When it comes to accounting notations on government accounts, they are literally irrelevant. When were talking about the government’s money supply, “infinity plus one” still equals “infinity.” The “plus one” is irrelevant. Same with “infinity minus one.” The up and down movements of accounting notations have no bearing on government. This is a core principle of MMT and, forgive me for saying, I’m surprised you haven’t grasped it yet.

The failure isn’t on my end friend. What I’m hoping you’ll recognize is your conflation of the fiat system that exists with another that could exist. No more double speak. I make the distinction you should be making. This doesn’t mean I don’t understand MMT, what it means is I’m not confusing what is with what could be.

“Perhaps more problematic with your position than the empirical evidence is the following: There is an inconsistency between regarding “GS + T” a false proposition while regarding taxes as payments to the GS in settlement of GS imposed tax liability a true proposition.”

There is no inconsistency whatsoever because one is operational (taxes are indeed paid for tax liability) and the other is effective (taxes are not needed for government accounts, they are needed to regulate aggregate demand).

“GS + T” does not say anything about whether “T” is needed to fund spending or not, it just describes what happens.

And you didn’t understand what inconsistency I was referring to anyway, which is my own fault for not elucidating. I was trying to be succinct. I’ll explain momentarily.

The former follows from the latter, and the latter is foundational to MMT.

The “latter” is not “foundational to MMT.” The only foundational thing to MMT about taxes are the need to regulate aggregate demand, not settle tax liability. That’s what taxes do. It’s right there on Mosler’s site in red letters.

Where did you get this extremely warped understanding of MMT?

You’ve misunderstood what I was alluding to. To clear things up: Within MMT, tax liabilities generate value for fiat currency by creating demand amongst the NGS for the currency. The goal of satisfying the tax liability is the reason why the NGS will accept otherwise worthless currency in payment for real assets the government wants from the NGS which the NGS produced. To suggest NGS withdrawals intended as settlement of this tax liability are in fact money destruction is inconsistent with this foundational MMT belief. Money destroyed upon withdrawal cannot settle a liability. When money is withdrawn from NGS accounts, it is not destroyed, it transfers possession as it’s deposited into government accounts in settlement of the liability. And at no subsequent point is this money destroyed once in government possession (perhaps some Reserve Notes which are damaged are destroyed, but that’s a maintenance issue). Rather, the money continues through the recycling process wherein the government reuses the money for further spending.

To sum and conclude, no more conflation and MMT will avoid the framing problem JD and others have experienced.

The HTML tags didn’t work… Trying this again hopefully with functional tags.

Your value judgments on what you regard my level of knowledge and understanding to be of MMT or of any other subject for that matter are entirely irrelevant. Let’s agree to focus on evaluating the validity of the arguments as well as the truth value of the propositions under consideration.

Below, I’ve responded to your remarks point by point in a similar fashion as you. I’ve concentrated my attention on those points I’ve deemed are of the greatest importance, which will, I believe, demonstrate your arguments are unsound and your description of the monetary system mistaken. If there is something you feel I left out you would like me to address, let me know.

With that written:

I told you exactly what happens to federal taxes.

They are:

1) paid to the Treasury by citizens,
2) deposited in TT&L accounts by the Treasury,
3) “paid” by the Treasury to the Fed to “service the debt”, and then
4) returned to the Treasury by the Fed as per law.

Your description of operations is rather ironic. Step one and two are equivalent to the mathematical expressions “NGS/NGM – T” and “GM/GS + T”, the second of which you are disputing. Your step one is the withdrawal; non-government sector (NGS) accounts are debited by an amount “T” such that non-government money (NGM) decreases by “T”. Again, mathematically this expression is “NGM/NGS – T”. Your second step is the deposit of “T” into government sector (GS) accounts wherein government money (GM) increases by “T”. Mathematically this expression is “GS/GM + T”. It’s not terribly consistent for you to reject the mathematical representation of the english statement.

Secondly, your description of operations fails to illuminate some of the material facts. Most glaringly absent from the above is any mention of what the Treasury does with the money the Fed returns to it in step 4. The money is sent back to the Treasury, and then what? What’s step 5? I don’t suppose the Treasury does exactly what I’ve been suggesting, i.e. spends it?

If in step 3 “service the debt” means “pay the interest the Treasury owes the Fed on treasury bonds the Fed holds,” you’ve only accounted for a small fraction of tax revenues. Interest paid to the Fed over recent years has been approaching 100 billion annually; tax receipts are well over 2 trillion annually. 100 billion is less than 5% of tax receipts. What does the government sector (GS) do with the fairly sizable remainder? It must do something with the money given it was deposited into its own accounts. I don’t suppose it spends it?

Fortunately we don’t have to speculate. The government has told us what it does with the remaining tax revenue, and *gasp* amongst other things it does spend it. As a currency issuer, the U.S. government is also a currency recycler, which is to say it reuses money it has previously created via fiscal operations.

What’s so strange about this conversation is; nothing I’ve written is inconsistent with the substance of MMT. My concern is for an accurate description of the existing fiat system so the problem JD experienced with his wife can be avoided at a broader scale. Stop framing the discussion incorrectly, and in doing so you will not sacrifice anything substantively in MMT, and you will not set a hurdle in front of your message.

As I said. Tax revenue is taken out of a private account and deposited into a public TT&L account.

“This is the nature of a money transfer. It isn’t a coincidence NGS accounts decrease by a proportionate amount to the GS account increase.”

Again, as I said. I never said anything to the contrary.

Yours is a good example of the conflating double speak I was referring to in my original post. It is important we keep in mind that what we are ultimately concerned with in this conversation is identifying the actual fiat system that exists and describing it accurately. On the one hand you claim it is descriptively accurate to affirm taxes are withdrawn from NGS accounts and deposited into Federal government owned TT&L accounts, which by definition involves a transfer of assets from the NGS to the GS, and yet on the other hand you (or at least other MMTers) claim it is also accurate to describe this withdrawal from NGS accounts as money passing out of existence. No, the money still exists because it has been deposited into the GS accounts, as you yourself just acknowledged. After all, if the money was destroyed, how could it be used to service the debt the Treasury owes the Fed as you claimed? Be consistent.

“Taxes aren’t the only reason GS accounts increase, but it is one empirically verified reason.”

This is where your mistake is, and for two reasons.

1) We’re not talking about how taxes relate to an account, where [sic] talking about how taxes relate to the money supply

No, we were not talking about what happens to the money supply when “T” is subtracted… We agree the money supply decreases. Now, let’s move away from the red herring and return to what we were talking about, and what we were talking about was whether it is descriptively accurate to claim GS accounts increase by an equivalent amount to the NGS decrease, from which one can infer the money was not destroyed, it was transferred. In other words, we were evaluating whether GM/GS + T is true or not. You’ve claimed it is false. I’m telling you it is an empirically verified fact which is evidenced by the money transfers from NGS accounts to GS accounts in equivalent amounts, the former decreasing by “T” and the latter increasing by “T”. As noted above, what’s interesting is you actually happen to agree with this description empirically (or what you’re calling “operationally”), but then you have this irrational abhorence to anyone actually saying “T” is added to government accounts because that means “T” funds spending, and god forbid, we can’t have that! We can’t have currency issuers recycling the money they created!! Heresy!!!!!

See, you and other MMTers stumble when you claim the transfer of assets from the NGS to the GS is money destruction. No money is deleted or otherwise passes out of existence. That is an observable fact. “But we mean money is destroyed in an effective sense.” Your so called “effective sense” is garbage philosophy. What you’re really doing is conflating a description of a hypothetical fiat system that could exist with the description of the fiat system that actually exists. Money could be destroyed as “T” is substracted from the NGS, but that isn’t what happens currently. You need to better differentiate between what is and what could be. MMT should be better about this in general. In failing to make the distinction explicit, MMTers only set a hurdle in front of acceptance of their theses, as evidenced again by JD’s article.

2) Effectively, government accounts neither “have” nor “don’t have” money. From an operational, accounting perspective they say they do, but from an effective perspective, they can’t.

Nathan, all we are concerned with is an accurate description of reality, and it is in fact accurate to say the U.S. fiat system does in fact have some finite set of money. Could they issue more? Sure. Could they shift an 8 ninety degrees and have an infinite amount in their account? Sure, why not? But we aren’t concerned in this conversation with what could be, we are concerned with what is. Again, you’re conflating a purely theoretical fiat system (perhaps the “purest” version of a fiat system) with the real one–you’re conflating “could be” with “is”–which again is what I’ve been saying since before you joined this conversation.

That is the equivalent of saying the government can only have a set amount of money, something that is the complete antithesis of MMT (and flat out wrong).

It does not follow in any sense that if the currency issuer has a finite set of money, it can only have that finite set of money. The issuer can change the set of money that exists to whatever it wants that set to be. That is what it means to be an issuer. This sloppy distinction between “effective” and “operational” is obfuscatory nonsense.

The government only “creates” or “destroys” money, it doesn’t “have” it.

As a description of our fiat system, it is an empirically verified fact the Federal government possesses a set of money which increases and decreases relative to fiscal operations. The government only has some percentage of the set of money it has created, and that set is currently finite. It is limited by its own choice. That doesn’t mean the issuer can’t change the set through actual money creative and destructive events, it’s just an empirical fact. You could accept the empirical fact as the fact that it is if you would no longer conflate your hypothetical fiat system that could exist with the one that does exist and disposed of this “effective” language which only obfuscates what’s at issue.

A government account at a commercial bank can say whatever it wants. It doesn’t matter because the government can change it at will.

As a description of reality, of course it matters. That’s the issue.

When it comes to accounting notations on government accounts, they are literally irrelevant. When were talking about the government’s money supply, “infinity plus one” still equals “infinity.” The “plus one” is irrelevant. Same with “infinity minus one.” The up and down movements of accounting notations have no bearing on government. This is a core principle of MMT and, forgive me for saying, I’m surprised you haven’t grasped it yet.

The failure isn’t on my end friend. What I’m hoping you’ll recognize is your conflation of the fiat system that exists with another that could exist. No more double speak. I make the distinction you should be making. This doesn’t mean I don’t understand MMT, what it means is I’m not confusing what is with what could be.

“Perhaps more problematic with your position than the empirical evidence is the following: There is an inconsistency between regarding “GS + T” a false proposition while regarding taxes as payments to the GS in settlement of GS imposed tax liability a true proposition.”

There is no inconsistency whatsoever because one is operational (taxes are indeed paid for tax liability) and the other is effective (taxes are not needed for government accounts, they are needed to regulate aggregate demand).

“GS + T” does not say anything about whether “T” is needed to fund spending or not, it just describes what happens.

And you didn’t understand what inconsistency I was referring to anyway, which is my own fault for not elucidating. I was trying to be succinct. I’ll explain momentarily.

The former follows from the latter, and the latter is foundational to MMT.

The “latter” is not “foundational to MMT.” The only foundational thing to MMT about taxes are the need to regulate aggregate demand, not settle tax liability. That’s what taxes do. It’s right there on Mosler’s site in red letters.

Where did you get this extremely warped understanding of MMT?

You’ve misunderstood what I was alluding to. To clear things up: Within MMT, tax liabilities generate value for fiat currency by creating demand amongst the NGS for the currency. The goal of satisfying the tax liability is the reason why the NGS will accept otherwise worthless currency in payment for real assets the government wants from the NGS which the NGS produced. To suggest NGS withdrawals intended as settlement of this tax liability are in fact money destruction is inconsistent with this foundational MMT belief. Money destroyed upon withdrawal cannot settle a liability. When money is withdrawn from NGS accounts, it is not destroyed, it transfers possession as it’s deposited into government accounts in settlement of the liability. And at no subsequent point is this money destroyed once in government possession (perhaps some Reserve Notes which are damaged are destroyed, but that’s a maintenance issue). Rather, the money continues through the recycling process wherein the government reuses the money for further spending.

To sum and conclude, no more conflation and MMT will avoid the framing problem JD and others have experienced.

If you keep insisting that accounting notations matter on government accounts …..

(which you are…see comment “Your second step is the deposit of ‘T’ into government sector (GS) accounts wherein government money (GM) increases by ‘T’. Mathematically this expression is ‘GS/GM + T’.”…..it’s a government account, Robert….. so infinity + 1 = infinity……. therefore, “+1″ does not exist…..operational aspects do not matter on federal government accounts),

……then it is demonstrably proven that you do not understand MMT. I’m not saying it to be mean here; it’s just a fact. Until you “step through the looking glass” and stop treating government accounts the same as private accounts, then debating you is the equivalent of debating Peter Schiff or Ron Paul.

I’m right and you’re wrong. Get over it. If you don’t want to believe me, feel free to ask the owner of this blog…..or anybody.

If that doesn’t satisfy you, feel free to post an email address you can be contacted at (just type it so it doesn’t get picked up by the web crawlers programs) and I’ll have Warren Mosler tell you you’re wrong. I have his email, we’re connected on LinkedIn, and I’ve discussed MMT with him numerous times before, so I have no problem shooting him your comments.

I have to warn you, though – once he reads your comments, he’s going to have a chuckle.

Some people come to this site to learn. Others to help them learn and others, as Randy said in the first paragraph of his last post , for their own purposes. Some are Trolls trying to divert MMT. IMHO arguing with these are in the immortal words of Local 1199 Union leader Aberdeen David “just spinning your wheels”. I don’t know which category Robert is but I don’t think he wants to learn MMT.

If Warren is interested in having a conversation with me, I’d be happy to oblige wherever he believes is most suitable (perhaps here in this site’s forum? This way the conversation is public record and people can thus be accountable while concurrently edifying the audience; e-mail however is fine too). He’s always struck me as a perfect gentleman, so we should have a pleasant chat. In the mean time…

Nathan, I’m glad you’ll now acknowledge the expression “GS + T” is in fact true, although you’re quick to try and sweep that acknowledgement under the rug with your “infinity + 1″ argument, which amounts to more conflating nonsense. We are making some progress though, so let’s see if we can’t continue with additional fact awareness and acceptance. And the fact is “infinity + 1″ is not an accurate description of the U.S. monetary system (or any other fiat system I’m aware of). The U.S. government simply has not issued an infinite amount of money. I would love for you to show me any actual evidence to the contrary. Refute my claim. You can’t. You even acknowledged previously GS accounts do read with some finite number exactly as I’ve been alleging. One wonders why our government officials regularly express concern over insufficient revenue to fund government commitments if the Treasury’s general account actually reads like a sideways 8 (or some equivalent expression). The truth is, the Treasury’s general account contains a finite set of money, so when “T” is eventually added to it, GS/GM increases by “T”. As a description, that’s what de facto happens.

The bottom line: Once again you are conflating the monetary system that could exist with the one that does exist.

Whoever had the original insight that taxes are not needed to fund government spending was absolutely correct. They are however needed to settle a tax liability. At a minimum then, money must be transferred from the NGS to the GS (rather than being destroyed upon withdrawal from the NGS) for the system to be internally consistent. Once in possession of the transferred assets, I suppose the GS could then delete them (now that the liability had been settled), but that would be superfluous. It is more sensible for the government to keep the money its collected and recycle it, all of which is in keeping with the soul of MMT. Currency issuers are also currency recyclers.

Remember what this article was concerned with: MMT’s description of the monetary system is often being met with abhorence. JD’s experience is hardly isolated. Well, the description is mistaken, so if it is discarded, MMT will no longer set its framing as a hurdle in front of their important theoretical synthesis. I think the theory could use a bit of refining, but it’s the best we have thus far and contains much truth to it. It’s exceedingly important the Obama administration gets its hands on at least some of the elements of MMT before this country drives directly off of a cliff into the austerity abyss. MMT is the only voice I’m aware of providing any sort of substantive foundation to the President’s rhetoric. Your and others’ incessant insistence on conflating–it’s only a hindrance to the progress we’d all like to see.

The next question is, ¿how many money, resources and effort are the goverment, citizens and companies wasting in all the cumbersome bureaucratic process of collecting and paying taxes? ¿Has anyone in MMT tried to get this numbers in terms of potencial loss of GDP?

For instance, in an MMT scenceario, do we need to have VAT taxes? Couldn´t be possible to just collect all taxes once and for all? What is better, consume taxes, property taxes, income taxes?

Finally, a two considerations regarding this “It occurs to me that the first sovereign country that politically understands this, and is able to align its fiscal policies accordingly, will become so wealthy and prosperous it will rapidly dominate all other economies”.

First, please, do not separate the ecological implication of ¿eternal? growth with the unlimited amount of money available. I think, ultimately, MMT must take into consideration how we define growth in terms of economic output and resources available. The application of MMT could provide the fiscal space needed to change or modify in a timely maner our unsutainable growth pattern.

Sencondly, what would happen to those countries with weaker economies and therefore weaker currencies when every country would accept to implement MMT policies? How this scenario would look like?

I’m forever looking for holes (not flaws) in MMT and I’m yet to find any.
Any flaws by those going after the mechanics of MMT are so complicated that they make the same mistake J.D is saying we in aggregate 😉 are making about spreading MMT.

I admit I’m very sympathetic to MMT and I don’t need this tax funds things narrative, as this ‘fiscal space’ thing has been explained in the MMT literature I have read (mostly MMT blogs) as THIS narrative is the exact one I’ve read in MMT, taxes transfer real resources and that’s what we mean by taxes fund government expenditure.

So I don’t get what other people don’t get. Do they read one piece and throw their hands in the air? If so, its not MMT fault. If interested read further.

So in summary whilst I think the narrative is a good idea for some, I do not see anything new here. Or maybe its just late and I really don’t get the point.

Excellent post JD. I’ve often found myself arguing over taxes and realizing that sometimes you have to just accept the common language framing that everyone uses. For instance, I was signing the white-house petition to allow open access to journal articles. They petition says that our taxpayer dollars fund the research, so it shouldn’t be hidden behind pay walls. While technically not correct, it’s much easier for people to understand this thinking.

Aitor, I think I’ve seen Randy Wray post before on taxes. Someone correct me if I’m wrong, but I believe he advocates removing taxes in income and consumption and added more tax to rentier type activities like property ownership and speculation. I tend to agree.

I should reveal that my first attempt at an alternative “story” about why we pay taxes was just as fictitious as the present one―but it was a story, I hoped, that would have better consequences. (Our current story is making us miserable.) Stephanie Kelton’s editorial response to this was that an alternative narrative couldn’t be another fiction, but had to be connected to what’s actually happening―which she then explained to me with some clarity, and asked me to try again. That’s how the “fiscal-space” description came into being. Again, I’m not an economist: I’m just trying to come up with a way of framing this that my wife might accept, and that Dr. Kelton will allow to be published!

This is the first time I’ve come across your blog, and I’d like to congratulate you on finding MMT’s only problem.

I was hitting on a similar thing on RMM’s blog a while back. I’ve always thought MMT had a communication problem rather than a theoretical one. I actually advocated going all Orwellian when we speak. Call all government spending “investment”, for instance. Maybe the end justifies the means.

To complicated. Need to keep it simple so every one understands. Like “Clinton’s surplus caused Bush’s first recession. that’s what surpluses and balanced budgets do” and /or “reducing the deficit at this time will send the US back into recession” you can include Mosler’s law “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it”

It’s clear simple and consist let the other side explain why it’s wrong

John,
While the purpose of taxation is very clear in my mind, that purpose often becomes problematic for many people.

First my understanding of the purpose of taxation.

1) To regulate the total amount of money and money like instruments in the economic system. Too much money can cause inflation, and too little money deflation. Deflation is more problematic than inflation. Deflation causes the economy to gum up – to freeze, so to say – this causes an immense amount of misery – leading often to social unrest, wars and famines – the four horsemen – so to say. Fairly large inflation rates can be easily tolerated, as long as the incomes of the population keep pace with the inflation. The community (government) can easily take care of the imbalances by increasing spending to the sectors that are affected, for example seniors on a fixed income can be helped by increasing social security payments.

2) Taxation serves to prevent the concentration of wealth and power. This is where many people start having a problem. Most people are naturally avaricious, and competitive. They like to accumulate “things” and engage in a game of one-upmanship with others. This determines social status. However, excessive inequality and concentration of power is very detrimental to the well being of the society at large, and that too can end up in the four horsemen scenario.

The second purpose can be served by taxation (property taxes, estate taxes, income taxes, land value taxes, luxury taxes etc.) or it can be served by other legal means, which prevent that concentration from occurring. However, in a free market economy, it is very difficult to prevent wealth from concentrating — there are many reasons for that, and hence the need to tax concentrations of wealth.

Clonal, you raise an important point. There are political value judgments to be made here, and difficult policy issues to be addressed that don’t go away once people understand MMT. Changes in the fiscal stance of the government, it’s total set of tax requirements and spending authorizations, do not just effect the aggregate level of demand, but influence the distribution and re-distribution of national wealth.

This point came up on RMM’s blog in a similar form. Someone mentioned having all tax/economic/monetary policy separated from politics and politicians….a sort of independent “economic department” that can make decisions outside of political partisanship.

At the end of the day, however, it boils down to the same question: How democratic is it to force people to live democratically?

an interesting way of putting it. i’ve got a less positive way to characterize the issue: taxes allow the government to coerce the private sector into providing it with real goods and services (e.g. military). this isn’t a taxes-finance-government-spending argument. taxes create demand for the sovereign currency by force, which is what the government needs to make ‘voluntary’ exchanges with the private sector. i don’t recall exactly where i got this argument, and while it sounds a bit libertarian, i think it’s actually more marxian. just thought i’d throw it out there.

The anger your wife feels is something to both acknowledge, worry about, and productively manage. Don’t get angry, get even, by getting free. Next, tell her that her family, her parents, and her grandparents never even needed to pay FICA taxes the last 70-some years. That will really cause some resentment.

“We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.” FDR

logic was sacrificed to politics, right from the start

How would YOU tell 150 million salaried adults that their wages needn’t ever have BEEN taxed their entire life? And that they were taxed ONLY to keep one class of people over-taxed and under-funded relative to another class of people? Worse, that same was true of the FICA taxes levied on their parents & grandparents! Them’s fightin’ words!

There could be hell to pay for all that have contributed to that truly disgusting crime, through silence, fear or complicity. If that’s not treason of the highest order, then we may as well all emigrate to some country where honesty, courage, morality & national ambition still reign.

The scale of the Social Security fraud leaves one nauseous. It’s not what one wants to think of one’s own country.

To realize that there are whole foundations dedicated solely to maintaining a regressive tax on labor, only exacerbates the shame. Taxing labor cannot be accepted as the prerequisite for any public policy whatsoever. If we can – as simple policy – vote subsidies for highways, space exploration, worldwide military capabilities, corporate farming, and endless corporate supports – from agriculture to research – then we can also support our own citizens as a simple policy.

For any person who perpetuates a fraud after being advised of operational reality, the fraud is no longer innocent. It is self-defeating for their own family, children & country. It is treason.

Innocent Fraud As a Business Model = saying regulation must NOT be n-dimensional … and succeeding with that propaganda;

the poor have paid huge penalties relative to the wealthy & frauds – through corporate aSocial Security, since 1934;
by taxing the poor through FICA taxes, to pre-charge for the pittance an increasingly richer aggregate “may” give them “if” they live long enough

That’s essentially just a way for one class or clan to over-tax & under-fund a perceived competitor class; instead of working together productively. It’s a tragic travesty!
By doing this we’ve drastically curtailed the return-on-coordination that would have been possible the last 70+ years.
Working hard to be less than the sum of our parts?

ps: Comically, last time I mentioned semantics to Stephanie Kelton, SHE sent an angry email to ME, saying her head was about to explode. Rather afraid to talk with her since. Of course semantics is a problem, and of course public policy can’t be guided by accounting alone. MMT is a necessary but not sufficient step in aggregate agility. So is recruiting people from the 2000 & growing NAICS fields, acknowledging & using & fusing distinct jargons, and above all else COORDINATING graciously & gracefully!

The shredding business always struck me as a red herring J.D. It doesn’t matter whether physical currency is shredded or recirculated. It doesn’t matter whether money is injected into the non-government sector via a printing press or via computer keystrokes that modify an electronic database or account. The issues are the operational constraints on spending and the policy constraints on spending.

I also think we need to avoid the trap of “Free Lunch MMT”. This is an informal version of MMT you find floating around the blogosphere wherever MMT is discussed. There are some people who learn some of the initial MMT ideas and immediately jump to the conclusion that they have discovered a world of endless free money and wealth.

The only reason the shredding argument holds any water is to think a couple steps more and ask yourself: “Could anyone else shred the cash they receive for payment of something and still get credit for it?” Think about it. I know I cant or my neighbor cant. I cant walk to a bank and say “Hey I got 1000$ cash from my neighbor today but it was nasty so I shredded it, but I made this receipt out and Id like you to credit my account with 1000$, Thanks!” If I go to a bank and make a payment with cash for something, they will give me a receipt and keep the cash. At some point though that physical cash must make its way to a reserve banks hands in order to count. I cant see a situation where a bank takes my cash gives me a receipt and then shreds it and then simply credits its account the 1000$ or whatever. Somewhere they need to show the physical cash to someone in order to say that they have it. But since the govt IS the scorekeeper they literally can shred it and just put some more in anyones account they wish, including their own.

With the Free Lunch thing it’s more the case that persistent nairu austerity light/heavy runs the economy too weak and cold and the unused capacity is a Wasted Lunch; running the economy at full capacity restores the Wasted Lunch, rather than it being a Free Lunch.

Your wife’s response and MMT difficulties in being accepted goes way beyond semantics. The difficulty lies in the psychology of perception, fall out from paradigm shift or shift in what Buddhist psychology calls ‘View’.
In my own case, I had heard my whole 60+ years that the national debt was crushing the US and lived with the false equivalency and wrong scaling ‘View’ that the national economy was like my personal check book and it had to be balanced…included in that is that taxes are collected as that is the only responsible way the government can buy things unless it prints money which can only cause hyperinflation…and that borrowing money from investment banker types done moderately is the only other way for the government to get money to spend. That was my view…deeply imbedded until I read Warren Mosler’s 7 Innocent Deadly Frauds and watched the 2010 Sustainability Teach-In.
I then literally had a cognative dissonance headache for about 4 weeks until I realized I was in the middle of a paradigm shift.
If you read the wiki on Paradigm Shift: http://en.wikipedia.org/wiki/Paradigm_shift,
it will be clear the MMT educators have their work cut out for them and the shift will not happen quickly.

One further thought here: I don’t think the challenge for MMT consists simply in finding better ways of framing a story that is already complete, but also probably requires completing the story in certain areas where it is too sketchy.

What is the MMT theory of prices? According to MMT, what causes inflation? Are there any mathematical rules – even approximate ones- that govern the relationship between the rate of inflation and other measurable macroeconomic quantities? How does the policy-maker decide whether a projected deficit is too big or too small?

Suppose you have read all the MMT literature, and you are now put in charge of directing the nation’s macroeconomic policy. You believe the government needs to run a deficit to accommodate the private sector’s savings desires while maintaining enough spending to generate full employment while not creating unacceptable price instability. How big does that deficit need to be? What do you recommend? What degree of inflation or price volatility should you regard as unacceptable?

Remember that most of the MMT theorizing about price stability and inflation occurs in the context of discussion of the Job Guarantee. So you can’t leave that part out and still have a plausible story to tell about macroeconomic policy.

I should say also that I think it it will help immensely when Mitchell’s and Wray’s macro textbook is released. I’m assuming that will assemble a lot of the scattered MMT material in a clear and organized way.

This “framing,” though valiant, seems like a deception that won’t last, except item (a) – inflation control. Your wife is going to catch on quick to (b), and she’ll be even angrier because this framing is no innocent Neanderthal confusion but a deception, intended to dupe.
But there might be many other reasons to tax: social planning (taxing tobacco, e.g.), economic planning (tax land to drive it into the public domain), redistribution of wealth to prevent too much influence among a coterie of too few rich (no worry about contraction as long as more fiat money flows to the ordinary consumer to create greater demand). Who knows, maybe even taxing excessive tuition fees (to drive down college costs and increase efficiencies?) while funneling money to public universities. Libertarians would have a fit, but they’d object to MMT on principle anyway.

I appreciate the comment about the “free lunch” problem. In Monopolis Monoply I tried to emphasize that the currency issuing government paid the players for building things and providing services. That’s not a free lunch. MMT needs to emphasize that modern money dynamics makes it “easier” for the sovereign government to buy goods and services from the citizens–not simply sprinkle money over the tops of their heads. For me, as an architect, the underlying issue is that it’s fundamentally illogical for hundreds of thousands of people to be unemployed when there are LOTS of things that need to be created and built. To maintain that this situation is necessary because the “government” doesn’t have enough money borders on being criminal. With regard to earlier comments about limits to growth and sustainability, I applaud until my hands are sore. That is the core theme of my novel, The Architect Who Couldn’t Sing! I tried to address it in this post by invoking Wendell Berry at the end. What we need to be unleashing our economy to build is a SUSTAINABLE world. That will be “expensive”, will require sophisticated technology that hasn’t even yet been developed, and will require paying a lot of people to make an enormous effort. What I find exciting about MMT is that it tells me this is possible.

For me, as an architect, the underlying issue is that it’s fundamentally illogical for hundreds of thousands of people to be unemployed when there are LOTS of things that need to be created and built.

I agree with that sentiment 100%. It’s crazy. One of the worst aspects of our reliance on private sector entrepreneurialism and “sound finance” is that it leads people to wrongly infer, from the false premise of market efficiency, that if work is not being done there must not be any work to be done whose value justifies the cost of doing it. I think that’s nuts. We have outdated systems falling apart all across the country. What world are they looking at.

Your wife it seems is one step ahead of you (and MMT), and it is NOT a matter of semantics. The fact is that the tax code is DESIGNED as if taxes were paying for some THINGS, when they are clearly not.

Perhaps the best response is to ask her (and MMT), given that taxes do not pay for things but rather act as a control on inflation, how would SHE design a tax code that did just that? In all my years of advocating for MMT, the fact that it does not address this particular question sticks out like a sore thumb, and MMT is not likely to gain a broad acceptance until it can come up with some answers to this that John Q. Public (and your wife) can understand.

My Federal tax code would include a corporate gross receipts tax, not a corporate income tax. I think at something less than a 5% rate it should be the main workhorse of revenue collection (or money destruction, as you wish). No deductions, no credits, all business receipts included (sole proprietors and partnerships as well as LLC, subchapter S, and C-corps).

I would have an estate tax with an exemption of $1M per heir (not based on the size of the estate, but on the size of the individual bequests). That should serve to help “break up” concentrated wealth.

I would have an income tax, greatly simplified and with much lower rates than today in the US. A zero bracket amount sufficient for a modest living, a 10% rate up to the top of the “middle class”, and 20% for “the rich”. No distinctions about capital gains or dividends, since there is no double taxation to speak of. No deductions. Exclusions only for items that should be claimed by others as income, for instance alimony.

No payroll taxes of any sort.

Low rates don’t cause so many disincentives or misallocations of resources. Corporations are very efficient tax collectors. Simplification puts lots of accountants and tax lawyers to work doing useful things instead.

I would leave the taxing of land to the States and cities, but I like the idea of residential real estate taxes based on square feet of living space, rather than value. Local governments have the infrastructure in place to tax real estate already, and changing the basis should be easy and is itself a simplification compared to market value assessments.

“I propose the replacement of our current system of individual and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive “revenue neutral” Automated Payment Transaction (APT) tax. The APT tax consists of a flat rate tax levied on all voluntary transactions. The total volume of transactions represents the broadest conceivable tax base and therefore requires the lowest conceivable marginal tax rate. Since the efficiency (misallocation) costs of a tax system tend to rise geometrically with the marginal tax rate, a massive reduction in tax rates can save an estimated $300 billion of misallocation costs associated with the current tax system.
“The APT tax is automatically assessed and collected when transactions are routinely settled through the electronic technology of the bank/payments clearing system with no deductions, exemptions, or exclusions. The APT tax also imposes an automatically collected tax on cash as it enters and leaves the banking system. All income and information tax returns are eliminated as taxes are digitally assessed and collected by the financial equivalent of the E-Z pass that is now used to speed traffic through a toll booth system on highways. The annual savings in compliance and administrative costs are estimated to be $200 billion per year.”http://www.scribd.com/doc/25299549/Feige-APT-Presentation-to-Tax-Reform-Panel-2005

1. “The Lorenz Curves reveal the highly skewed nature of the APT tax base. Since both net worth and total transactions are much more highly skewed than the income distribution, a switch to the APT tax will promote a progressive tax structure through the skewness of the tax base rather than through a progressive schedule of taxrates. This claim cannot legitimately be made by any of the other flat tax rate proposals. Since the distribution of income and wealth has become more highly skewed in the last decade, we regard this simulation as a lower bound estimate of distributional impact.” (link above)

The APT will work and work well, if ALL money transactions are so taxed, including ALL FINANCIAL transactions. Thus this would be a Tobin Tax on steroids, and massively skewed to the rich — unless of course one behaves as Scrooge McDuck, and hoard money — in which case, the money becomes non toxic. The rich get powerful only if they spread the wealth around! Hoarding money by itself does nothing – money is NOT wealth – but only POTENTIAL wealth. Converting money to wealth requires a financial transaction.

The APT Tax would have to be coupled with a Land Value Tax and a Resource Extraction Tax (for non renewable resources,) and then I think you would cover all bases. In other words, most rent should accrue to the community, and not to individuals.

J.D. , nice article. In particular, I have been saying that we need to “end our collective delusion” about taxes, much like your “massive cultural self-deception.” That’s an even better way of saying it, I think.

My problem with the “fiscal space” terminology is that I’ve heard that exact expression used as justification for the on-going austerity; as in, “we need austerity now to create fiscal space for more spending in the future;” as if there were a better time than now.

Mosler’s “taxes serve to regulate aggregate demand” could be rephrased: Taxes serve to regulate the economy and keep it from getting to hot or too cold. I agree people are commonly dumbstruck when you say it in the negative, as you did to your wife: “Taxes do not fund government expenditure.” But it leaves an impression…

This is a real problem. MMT’s descriptions speak very clearly to the question of why a government should desire to levy taxes, not so well to why taxpayers should want to pay them. Fiscal space resonates with policy makers, not taxpayers.

Our system of voluntary(ish) tax compliance works pretty well because “fair share” in a funding sense is intuitive. It taps right into a moral core of fairness and civic duty without much need for further explanation. MMT has the facts on its side but lacks that simple, intuitive hook for why an individual should feel obligated to pay.

When fully implemented, with a JG and all, taxes at least marginally would pay for expenditures. Increasing expenditures from a starting point of full employment without also raising taxes can only raise prices, as government takes real resources from the private sector, and there is no spare capacity to replace them.

Government needs to run a deficit in order to accommodate savings desires, but it also needs to tax in order to be able to buy the things it needs without causing excess demand. If government were a smaller portion of the economy, like 10%, then maybe no taxes would be necessary in some years, but when it is 25% or more, it seems unlikely that a deficit of 25% of the economy would cause no inflation.

I guess this is the same thing as saying taxes create “fiscal space”, but in a more understandable way.

Maybe if one thinks of the budget as being divided into two parts it could be more understandable. Part 1 is balanced, including tax receipts, government purchases of goods and services, and enough of transfer payments to offset the rest of the tax receipts. Part 2 is the deficit, including any other types of disbursements such as revenue sharing and transfer payments in excess of those offset by taxes. Part 2 needs to be big enough to accommodate savings desires, so as to promote full employment. But part 1 needs to be balanced, in order to avoid inflation or deflation. If you increase expenditures in part 1, you also need to increase taxes in part 1.

My English Mum (I’m Canadian) had almost exactly the same reaction months ago, when I tried to make the MMT case to her after supper. She did not exactly hammer the table, but her fist went white-knuckled around the nut cracker she held, upper lip stiffening as it does when she recalls the sound V-1 rockets made during the Blitz. “You make it sound like it’s monopoly money!” she said, stridently demanding a return to sterling (circa 1940)… And she is the very opposite of an austerian.

Mosler takes exactly the right tone, I think, when he says that we are “taxed too much for the public services we receive.” So, as several of you say, the progressiveness of the tax system has to be emphasized — i.e. taxation as an automatic stabilizer.

For federations, such as Canada and the US, a key issue is to emphasize the importance of inter-regional fairness in federal spending — the need to tax and spend so as to permit equitable outcomes in all states or provinces, with a special focus on the need to tax to control regionally-specific inflation, and to spend so as to forestall own-revenue tax competition between states/provinces (for a given level of federal spending) and thereby prevent a race to the bottom (something else Mosler talks about).

The framing on taxes is problematic, whether it’s tax as a break, spending as the “gas” accelerator pedal, or a leakage/injection analogy.

Surely the focus should be on the generality of foreigners net exporting to save our domestic currency $ or £ so to “fund” or balance this and domestic net saving, the government has to fill/fund the gap and keep on doing so until there’s full employment.

A good reason to be angry is that we’ve all been overtaxed, under publicly served, overpriced, underemployed etc for decades, for no good, just ideological reasons.

The problem your wife seems to be having is that she actually understands how the US monetary system works. The US Treasury has an account at the Fed called a TT&L account. This account MUST be funded before the Treasury can spend. MMT basically assumes that the Fed funds this account or that bond buyers use existing funds to buy bonds, but that’s BS. This account at the Fed is funded almost exclusively by private banks with ex-nihilo money.

The problem with MMT is not one of semantics. The whole story is a fake reality, a total myth and a misrepresentation of what actually happens in our actual monetary system. In short, your taxes most certainly do pay for things. Just ask the cash management team running the TT&L account. If you told them otherwise they’d laugh in your face and tell you to stick to your day job.

Peter, thank you for your assurances that my wife knows what she’s doing, which is something I believe as well! I looked up the TT&L accounts (which, as you suggest, is something I know little about.) I went to the Federal Reserve Bank of New York website and looked up the Treasury Tax and Loan Program. What it said was a bit confusing to a non-economist, so I’m hoping you can explain it to me:

“The TT&L program aids in maintaining the stability of financial markets by reducing uncertainty about the supply of reserves in the banking system and simplifying the Fed’s implementation of monetary policy. This is accomplished by having tax payments deposited into TT&L accounts at depository institutions, rather than in the Treasury’s accounts at the Federal Reserve, thereby allowing the tax payments to remain in the banking system.”

What puzzles me most is the last phrase: “thereby allowing the tax payments to remain in the banking system.” What exactly does that mean? Does it mean our tax payments are used by banks to make loans or, perhaps, even make hedge bets? Also what’s confusing–based on your earlier comment–is this: if the Treasury needs the tax payments to make its expenditures, then why is the TT&L account set up specifically to keep the tax payments in the banking system (i.e. out of the hands of the Treasury who’s supposed to be spending it)?

All US Government spending has to be authorized by the US Congress. Once authorized, the treasury does not need anything else to spend from its accounts at the Fed. If the amount in the Tresury’s accounts is short, it then “borrows” money from the Fed by issuing T-Bills. If this was not the case, deficit spending would not be possible. However, this “borrowing” is subject to a “gold standard” era law passed in 1917, that limits the total amount of money that the US Government can borrow. This “Debt Ceiling” could be raised or lowered only by an act of Congress.

However, it appears that a law passed in 1996 may allow the Treasury to bypass the Debt Ceiling legally – See the series of articles by Beowulf and Joe Firestone. However even thos law does not allow the Treasury to spend indiscriminately – as all spending must be authorized by both houses and signed into law by the President.

We humans are heavily emotionally invested in “work” because our sub-rational minds don’t see any difference between the old-fashioned form of work, which involved direct physical effort in wresting livelihood from nature, and which was repaid in immediate terms by survival; and modern work, which is entirely embedded in the group hallucination of society and money.

People find MMT maddening because it forces something into plain view: the fact that we are all of us operating in , and dependent upon, an abstract, man-created framework which can only exist because we all participate in it.

Taxes do pay for government expenditures not just in the financial way, but in real resources. Those who are tax liable have sell fruits of their labor to those who receive government’s money to earn the money to pay tax liability. It is this transfer of real resources that pays for government expenditures in reality since no-one works for money per se, but for the things money can buy.

My Peep; first I really enjoyed the monopoly explanation!
My original comment had to do with the inflation talk. To further confuse those like you wife(J.D.Alt’s) It seems some are forgetting there is no inflation and that MMT says we don’t worry about inflation till we approach full employment
and full production.
Huh- so now why are we paying taxes? Especially since we need a fiscal policy which allows government deficit and government support of aggregate spending.
What ever. I like Clonal Antibody’s comment: “Taxation serves to prevent the concentration of wealth and power”
It seems from all the discussion that this is really the only reason left to tax during a depression/great recession.
Further forgotten often in the technological explanation sis one of the basic tenants of MMT is what is the purpose of government?
And as billy mitchell always says everything goes back to political feasibility but further the preamble to the us constitution spell out one of it’s purposes is to further the social welfare.
Where is Stephanie Kelton’s critique of you little story?

Oh yeah, Forgot to mention.
local govs. must finance expenditures. They are not currency issuing sovereigns. Therefore: state income tax, property tax, state and local sales taxes, VAT if not federal, etc.

Great article. Over the years, a lot of people have posted remarks urging MMT scholars to get out of the their ivory tower technical explanations and try to understand why it is that people resist the MMT explanations and to formulate something popularly palatable and understandable. As Mr. Alt points out, technical explanations just don’t cut it. However, I don’t think the “fiscal space” dog is gonna hunt either.

Personally, I oppose all taxes except a property tax (except for one’s individual and reasonably sized private residence and its land, because the right to a secure roof ought to be sacrosanct) as explained by M. Hudson. We should go back to the idea that only unearned (rentier) income should be taxed. So I am not sympathetic to the enterprise of having to justify income and sales taxes. I also would submit that the idea that “taxes ensure legality and use of a currency” would be a lot more palatable (and is also more understandable) for the general run of people than “lowering aggregate demand”–on condition that taxes be viewed as reasonable and just and therefore explicitly restricted to eliminating rentier income, precisely. At the risk of offending some, I also am for the traditional strictures against usury, and well as for drastically changing our laws regarding the personhood of corporations. I think adopting these measures would go a long way towards re-establishing normalcy in the society on a host of fronts. Above all, I would support anything that makes of “the market” a quasi-theological entity. And by the way, I oppose Marxism inasmuch as it posits a materialist scheme of reality and turns humans into “proletarians.”

Nothing pays for federal spending. Dollars merely are accounting notations. When the federal government pays a bill, it sends instructions (not dollars) to the creditor’s bank. The instructions tell the bank to increase the numbers in the creditor’s checking account. The bank obeys, and instantly the creditor believes he has more dollars in his account.

Because dollars have no physical existence, all the creditor has is a higher number.

The federal government can send such instructions endlessly, It is Monetarily SOVEREIGN. The word “sovereign” says it all. The government is the absolute ruler of its sovereign currency. It can raise or lower the numbers in any bank account, including its own, at will.

To say that something “pays for” federal spending is to misunderstand the differences between Monetary Sovereignty and monetary non-sovereignty. Dollars are just accounting numbers that the sovereign changes any time it wishes.

But under current institutional arrangements and operational legal requirements, the Treasury is not permitted overdrafts on its account, and does have to have a positive balance to spend authorized amounts.

MMT is a theory describing how a Fiat currency works not a description of how the US Treasury works.

The limitations on Treasury are entirely voluntary and exist only because of the legal framework not because of any intrinsic limitations. It’s a function of US Law not Economics. The underlying economics doesn’t change but the laws can, and indeed are different in different countries.

“Economics” isn’t a fixed set of eternal verities – it describes the behavior of contingent human institutions. So while I agree the legal institutions under which we live are subject to change, I don’t think it is that helpful to try to draw a distinction between those legal institutions and some kind of pure economics. It’s better, I think, just to point out how the existing system functions, as well as to point out the policy options that are available both within the current legal framework, and those that would be available with relatively modest changes in that framework.

There is no one way that a fiat currency works. How any particular fiat system works is a function of the institutional framework and operational rules that have been set up for administering that system and transacting business and public policy within it.

I just said taxpayers don’t pay for anything financially. They pay by producing real goods and services – effort extended to earn the money that is required for tax payments is paying for government spending.

Those who work for the government do not work for the money but for the goods & services money can buy. Money is just an handy medium to faciliate this exchange.

A Possible Solution For Banking and Taxes
I don’t think there is any dispute that a growing economy requires an expanding supply of ‘money’ tickets. This increasing supply of money has to be related to the productive capacity of the goods and services required by the society. If this applies, then the new ‘money’ will be backed by physical assets, and thereby, constitute the creation of a ‘sound’ money supply. The contention that ‘sound’ money can only be created if it is related to gold or silver, is a spurious argument that only applies if ‘money’ is treated as a commodity rather than a ‘ticket’ system. In fact, it is quite ridiculous to say that a society can only create a money supply if it has a store of gold available to define how many ‘tickets’ can be created.
A Government is in the position to establish a genuine, honest and practical banking system based on the creation of ‘sound’ money as defined above. The primary objective of this system must be to serve the needs of the public in providing effective banking services.
While the fractional reserve system is essentially a ‘ponzi’ scheme, if modified and properly controlled, it can be made to serve for the benefit of the society. A solution lies in reversing the current procedure. Instead of allowing the private banks to create ‘new’ money, as they currently do by advancing interest bearing credit out of thin air, the Government, on behalf of the people, should create this ‘new’ money and sell it to the private banks. The private banks would be set up in the same manner as presently in place, by obtaining capital from investors through the issuing of shares, debentures or bonds. As legitimate registered businesses, they would be eligible to apply for, and purchase, ‘new money’ from the government at a low rate of interest. The amount of ‘new money’ they request would be set as a ratio of their capital, plus money they hold in deposit from their customers. If the ratio were set at the current rate of 12.5:1, as used by the Bank of International Settlements, this would provide the banks with an adequate level of funds to use in supplying credit to their customers. As the economy grows so would the customer’s deposits, thus allowing the banks to apply for additional new money to support the continued growth. The necessary controlling regulations would be related to the nation’s productivity where the Government would be the primary source for the creation of new money. A loan is merely a legal agreement, and in the case of advancing credit, it is simply the ‘monetisation’ of future effort. The borrower promises to repay the loan at a later date from the fruits emanating from the advance. In this respect, all credit is really public property because only people are capable of producing products and services that will create the ability to repay the advance. The creation of credit should never have been handed over to the private banks in the carte blanc manner which applies today.
Under the current system, Governments borrow money from private sources and pay interest on the bonds they issue. This revised system would operate through modifying the role of the Central Bank. Specifically, their role would be to monitor the nation’s productivity factors and handle the sale of ‘new money’ on behalf of the people. Provided the Government is constitutionally constrained from creating unrestricted ‘new money’ for themselves, a controlled fractional reserve ‘ponzi’ system is a way of increasing the money supply in keeping with the needs of a growing economy. Effective constraints would be by way of controlled budgets and constitutional restrictions to keep the level of money creation allowed by the Government in a defined relationship with a properly calculated measure of the nation’s current and projected future productivity. This would effectively control inflation, as the volume of money would keep pace with the volume of goods and services available. If appropriate, a Debit Tax System of .05% on any financial transaction, and thereby eliminate the need for any other form of taxation, could be coupled to the income from the sale of ‘new money’. This would provide sufficient evidence of the illusion that responsible government spending is adequately constrained. If the re-introduction of a proper “People’s” Bank is added to the mix, based on the concept and operation of the Bank of North Dakota, it would take the nation to the forefront of logical, rational and effective financial management. Initially, public finance would be reserved for the publicly owned Central Bank which could provide the necessary investment funds, at cost to the Government and municipal organisations, in accordance with independently assessed cost/benefit analysis for any proposed projects. If this financing is coupled to the requirement of controlled budgets and Constitutional constraints, as mentioned above, and taking into account currently outstanding loan commitments, the public sector would avoid the subsequent unnecessary interest charges relating to bond issues and borrowing from the private sector. This would have a major impact on the cost of Government and municipal services.
Under this arrangement, the private banks could remain a supplier of credit for the private sector, and with healthy competition; the banking industry would be sufficiently controlled in regards to the fees and interest rates the Banks could charge. The threat of expanding the Central Bank’s role into the private sector would have a sobering effect on excessive bank charges and high interest rates.
To ensure the private banks operated in a prudent manner and for the benefit of the nation, there would be a clear understanding that the Government would not be a lender of last resort should a bank get into financial difficulties. Private Banks would take out a level of insurance cover to protect their customer’ deposits as part of their standard business practice. If a bank is properly managed, this should not present a problem.
While the proper definition of financial Credit is a ‘monetisation’ of future effort, the advancing of credit will always carry an element of risk for the lender. This can be mitigated to a degree by due diligence analysis and/or a requirement of the borrower to supply some collateral.
Theoretically, there would be no restrictions on how a private bank used their capital funds, other than those imposed by their shareholders. Any time private banks request additional ‘new money’ they would need to present an audited statement of their accounts showing their current assets and liabilities along with proof of their reserve holdings. Banks would not be permitted to use the ‘new money’ for ‘investing’ in their own name, unless it were based on exactly the same conditions of due diligence and collateral as applied to their customers. In other words, banks could use the ‘new money’ to expand their business by building branches and appropriate income producing facilities, but not for speculating in unproductive financial products which are at the root of much of the current financial malaise.
While the banks would have no direct control over the way their client’s use any credit given them, that risk would, in part, be covered by the collateral held and the reliability of their customers. As the banks are fully aware they are entirely responsible for any financial risk involved, and cannot expect any bailout or rescue package from the Government, this should be sufficient for their shareholders to demand prudent management.
Creating a brake to the unlimited creation of ‘new money’ which, to date, has been unrelated to any control mechanism apart from the futile and ineffective manipulation of interest rates by the Central Bank, would severely curtail the extent of gambling in financial markets.
From a practical sense, the nation’s financial system would be based on ‘sound’ currency and a completely adequate supply of ‘money tickets’ in keeping with the growing economy. This would radically reduce the need for foreign investment, and divorce the nation from much of the artificial boom and bust cycles associated with international finance.
Speculation in hedge funds, derivatives, and overseas financial markets, would become a policy issue for the private banks, subject to shareholder approval and acceptance of the risks involved.

Actually, I agree with virtually everything you say, except for this bit – “This new frame leaves us free to debate (a) how large the “fiscal space” needs to be to keep inflation in check, (b) what specific things and services our public expenditures should be directed toward, and (c) what is the relationship between the two. Please note that this debate is quite different from the one that focuses on whether we can afford to build the things we need and have the services we require”.
The problem lies in the use of the words “us” and “we” and “our” – while the principles of the statement are, in my view, correct; the difficulty lies in the fact that these issues are decided by “governments”. As we are all well aware, very few “governments” actually act in the exclusive benefit of their society. Until that problem is resolved, the chances of a successful change of heart are rather slim.

Regarding the TT&L accounts, it is best to think of them as shock absorbers for the bank reserve (check clearing) system. Dr Kelton (aka Bell) makes this clear in her 1998 publication “Can Taxes and Bonds Finance Government Spending?”. The collection and disbursement of funds by the TT&L accounts prevents wild fluctuations in reserve balances from week to week as Gov’t spends or collects taxes. In a rapidly changing reserve balance environment the Fed would be unable to effectively defend its target funds rate and rapid clearing of our checks would be in jeopardy.

However, if the Fed would just pay interest on reserves, as it has recommended in the past, it could target its funds rate precisely and effectively eliminate the TT&L process. Or, the Fed could essentially eliminate paying interest on reserves, as it is now doing, which assures a zero fund rate outcome, which also eliminates the need for the TT&L process. These alternative administrative structures would allow reserves to accumulate to large sums, which might disquiet the rich, who seem to like holding the “debt.”

Dan, apparently the Federal Reserve already is paying interest on reserves. You had written (perhaps just a miswording?) as though they were not:

The Federal Reserve has long advocated for the authority to pay interest on banks’ excess and required reserve balances. For example, in March of 2001, Board Governor Lawrence Meyer argued that financial innovation had pushed bank reserves to such low levels that greater funds rate volatility might result. To push reserves back up to higher levels, Meyer advocated paying interest on reserves (hereafter, IOR). Many argued that IOR would make it easier to hit the federal funds rate target, and changes in the IOR rate could also be an additional policy tool.

Congress granted the authority to pay IOR in 2006, and the new policy was set to begin in 2011. This start date was accelerated, however, when Congress authorized the Federal Reserve Board to put the policy into effect in October 2008, during the heart of the financial crisis. According to the press release announcing the change, paying IOR was intended to help keep the fed fund rate close to its target, but it was also expected to “give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets….” Chairman Bernanke subsequently clarified that the policy would also allow the Fed to change the funds rate independent of changes in its balance sheet. (testimony to Committee on Financial Services, U.S. House of Representatives, February 10, 2010).

There is the skin of the earth and its resources.
Human values and capabilities.
These are dynamic and real.

The monetary system and no. of ‘$points’ extant, is a scoreboard (thanks Warren) of exchanges in these realities, but is itself created out of thin air! (Hence ‘vapour’. A plug-in. It can be whatever you want it to be)!

What is even more real? Even more important ….

When people look inside of themselves and see something that is ‘good’, respect and understanding, unison is born within that person (behaviour is a consequence).

As this grows, it extends to others, the skin of the earth and its resources and exchanges in values and capabilities.
It is always and ever a ‘human’ thing! Evolution in use of resources capabilities and values if you will! The world is simply a measure of how much kindness human beings have allowed to manifest in their hearts.

History says you can’t damm the tide of evolution …

The purpose of $money is to minister to human need. (Can’t think of any lasting other)?

Just like the rain ….. the mountains and the sky; this beautiful blue jewel of a planet. Just like love – so important to all of us. At least from a human point of view – what IS actually good – for us …! There is the real issue …

So, I concur: explain the monetary system as a scoreboard. And give the scoreboard meaning and purpose. Everybody understands the shadows (bribery etc.) too!

Better buy your better half some chocolates and flowers mate (and have a good chat about what is truly valuable to her as a human being)!! Should be more to agree about than argue over ……?

However, I don’t think “fiscal space” will work. Right now when progressives propose something, the hawks say, we can’t afford it because we’re running out of money. We can’t raise taxes, so we have to cut spending. Using the idea of “fiscal space” they’d just say:

“We can’t afford it because we’re running out of “fiscal space.” We can’t raise taxes to make more of that, so we just have to cut spending.”

So, I can’t see how “fiscal space” helps us. In fact, I wonder if the hawks just won’t deal with fiscal space by developing rules for projecting fiscal sustainability based on “fiscal space,” and then play the same game they’re playing now of reifying the fiscal space index the way they now reify the debt-to-GDP ratio. So, once again we’d be playing a numbers game rather than evaluating the real impacts of fiscal policy.

I think the approach to explaining taxation has to be contextual. Stephanie took that approach in her presentation at the FS Teach-In I’ve reviewed at the link above. The context is the origin of fiat money and pointing out that all money originates with the Government. Once that’s understood it’s easy to accept that if the Government needs to take back some of its money to:

1) maintain the value of the currency;

2) counter inflation;

and

3) maintain democracy by reducing inequality created by concentration wealth created over time by the natural tendency of self-organizing capitalism to create oligarchies of wealth

then that’s exactly what it should do!

It seems to me that your wife ought to be able to accept that if taxation is important for the above three purposes then it’s very much worth doing and also something we can’t do without if we want to secure the blessings of liberty for ourselves and our posterity.

The issue then becomes who should be taxed, how much, and in what ways? And we just have to evaluate that in terms of assessing the likely impacts of alternative taxation policies.

I think progressives will definitely run into trouble when they advocate destroying the rich’s money as a way to reduce inequality. To fight inflation, okay, but not until inflation is a problem. If President Obama succeeds in letting the Bush tax cuts expire for the rich, progressives should call it a day and stop talking about raising taxes. I doubt the Buffett Rule will be a political winner. In fact, it’s going to tick lots of people off to hear the president talking about raising taxes when he should be talking about unemployment.

I agree that progressives will run into problems doing that. But we did that before and it worked to hold down inequality for a very long time. I wouldn’t try it at the beginning. I’d just cut taxes and spend, and after MMT and progressive programs gained a lot of political credit, then I’d go after wealth. I’d probably use property taxes and luxury taxes primarily, and only later have heavier inheritance taxes. Also, it’s important to couch all this in the frame of patriotism and democracy, because the truth is that these are the values involved in progressive forms of taxation.

Stuff regarding I wrote on the mmtwiki (I would provide a link but I seem to get stuck in spam filters) – not sure if it’s over the top:

> Taking the US as an example, to see the details the Treasury and the central bank needs to be considered as separate entities (instead of as a consolidated government), which makes it more complicated. When taxes are collected the taxpayer’s deposit account is debited, and corresponding reserves are removed from the taxpayer’s bank, and thereby also from the interbank lending market. This change in reserves needs to be offset, so that the interbank overnight lending interest rate is not affected. Therefore, the same amount of “money” is simultaneously added to a Treasury Tax and Loan (TT&L) account, where they count as reserves within the banking system. This is essentially a reserve maintenance operation. The TT&L accounts can be thought of as providing a buffer stock of reserves, working to even out the spikes in reserve balances (that would have otherwise occurred in the banking system due to the non-uniformity of Treasury spending and taxing). Similarly, when the Treasury is to spend more than it taxes, the US law says it must issue Treasury securities (government bonds) and sell to the public. Thereby reserves are removed from the buyer’s bank’s reserve account with the Fed. Again, this change in reserves is offset by simultaneously adding reserves to a TT&L account — a reserve maintenance operation. Eventually, when the Treasury wishes to spend, reserves are first removed from a TT&L account and added to the Treasury General Account at the Fed. A check is then written to the agent receiving the spending. When it is deposited by the recipient, the Fed debits the Treasury General Account and credits the reserve account of the recipient’s bank – again without changing the total amount of reserves in the interbank lending market. For more on this, see Warren Mosler: Soft Currency Economics, Stephanie Bell’s (now Kelton) “Can Taxes and Bonds Finance Government Spending?”, Scott Fullwiler’s “Modern Monetary Theory—A Primer on the Operational Realities of the Monetary System” and Mecpoc: Operationally, Government Spending is Not Inherently Revenue Constrained. Any such Constraints Are Necessarily Self-Imposed

When taxes are collected the taxpayer’s deposit account is debited, and corresponding reserves are removed from the taxpayer’s bank, and thereby also from the interbank lending market. This change in reserves needs to be offset, so that the interbank overnight lending interest rate is not affected. Therefore, the same amount of “money” is simultaneously added to a Treasury Tax and Loan (TT&L) account, where they count as reserves within the banking system. This is essentially a reserve maintenance operation.

Hugo, this makes it all sound like the credit to the TT & L account is a kind of accidental by-product of interest rate maintenance operations. But isn’t there a much more direct operation involved? The taxpayer pays their taxes with a check. The payment is settled and cleared through the Fed’s payment system. As with all such payments, the account of the payer (or payer’s bank) is debited, and the account of the payee (or the payee’s bank) is credited. In this case the taxpayer’s bank’s account is debited and some Treasury account is credited. Isn’t that all there is to it?

If the Federal government has a rule that says you can’t order a box of pencils for a federal department office without submitting an ARX-30 form, then the question “Can the government buy a box of pencils without submitting an ARX-30 form,” then in one sense the answer is clearly “no”, since there is a law that requires them to do this. But it would also be appropriate in context for an economists to say, “the government doesn’t have to submit an ARX-30 form in order to buy pencils” if the intention was to point out that the rule in question is a self-imposed operational constraint that could be changed without overhauling the universe.

Good points, I will try to change it a bit. (Currently, this text is actually in a footnote, but I may promote it to regular text of some kind.)

I’m sort of trying go get a point across: As taxes are paid, funds are “transferred” to a TT&L account. This is needed – but not because the government “needs to acquire funds in order to spend them later”. The essential function is rather to avoid removing reserves from the interbank lending market when the taxpayer’s account is debited. If this wasn’t done, the removed reserves would cause the interbank lending rate to be affected. So, from an MMT viewpoint, transferring funds to TT&L accounts is essentially an interest rate maintenance operation.

“Similarly, when the Treasury is to spend more than it taxes, the US law says it must issue Treasury securities (government bonds) and sell to the public”

is misleading (though I’ve said the same thing myself once or twice). I think what Congress prohibits is the Fed lending money to the Treasury, which also includes allowing Treasury to run a negative balance in the TGA. The Treasury is free to do whatever is legal to avoid a balance. I think that includes getting electronic credits through taxing, borrowing, user fees, and coin seigniorage.

In particular, proof platinum coin seigniorage is a particularly important source of such credits. Since the President and Treasury Secretary can order the Mint to create coins of arbitrary face value to fill the TGA with sufficient funds to remove the need to issue debt instruments ever again (see for example: http://www.correntewire.com/filling_the_public_purse_and_getting_the_public_spending_we_need), I don’t think it’s true to say that debt instruments must be issued when the Government wants to deficit spend.

It is difficult for a non-economist to decipher the debates, which revolve around esoteric
terminology known only to the disputants – like “aggregate demand” and even “money.”
Most people certainly don’t know what economists mean by “money.” A friend of mine told
me he was at a meeting recently with a number of people, most of whom thought that
when the central bank increased the money supply it actually physically printed currency –
and all the people at the meeting were financial advisors.
As I said, almost all of the debates are among economists, bandying about terms that are,
in principle, quantified aggregates of manifestly intangible, imprecisely defined theoretical
objects like “aggregate demand,” “economic growth,” and “money” (not just currency),
none of which can be measured very accurately, even if they are defined.

“But wait. Taxes can create the “fiscal space”, but so could limiting the amount of money created in the first place… right? Same net effect.”

Same net effect on aggregate demand, but whatever the thing is that was the reason for spending didn’t get done. The amount of fiscal space required depends on the size of government.

“Seems also like we there is no good reason to require debt to create money.”

True. I recall that during the last debt ceiling fiasco the President/Treasury Secretary did just that, authorized and executed some spending that they considered most critical without having either taxes or borrowing to “balance the books”. If it happens, it must be possible.

Taxes are required for government spending, but in an indirect way, by creating demand for state currency.

I think the equivalence issue can be addressed by a discussion of where profits arise if everyone is exchanging equivalents (search Levy Institute for Where Do Profits Come From). That might yield a more fruitful conversation with spouse than starting from the evil taxes.

We really need to think of this in terms of resources, including human labour – in which case, it takes about 1/3 of productive capacity of a society to operate its gov’t functions. In order for this to happen, everyone needs to work/create 1/3 more than what they use. This will allow 1/3 of the resources/labour to do the work of gov’t (the bureaucracy, the military, the infrastructure, etc). And those are your taxes.

If you reduce it to primitive conditions, you have a group of people who meet, plan, and do the upkeep of the village. Say they are 1/3 of the village. In order for them to eat and have clothes, etc., everyone else has to come up with 1/3 more berries and meat and cloth in aggregate to support this group who are busy doing other things. That extra is tax. This can also be thought of as the ‘fiscal space’, but that’s just a wonkish way of saying it.

The money we pay in tax merely accounts for, or keeps a record of the fact that we have done the extra work of production to make up for those who are doing the work of organization (gov’t). In a functioning society, that organization should allow everyone else to produce more than they would have without the organization. Then your ‘taxes’ are actually netting you a profit.

Well, it doesn’t fit on a bumper sticker, but you can work it into dinner conversation easily enough. I don’t believe the “demand for state currency” argument is necessary for this explanation. I think the real question the wife is asking is, “Why am I doing $99 of work but only getting paid $66?” not, “Why am I using American money and not pesos or Wells Fargo Bank Notes?”

This idea works on a smaller scale too. A company has to produce enough product to pay the janitors to clean the place – a necessary but unproductive job. Same can be said of the board of directors. Kids may do chores around the house to allow the parents more time to work to get enough money to feed everyone, etc. These are all kinds of taxes, some monetary, some not. As most here seem to realize, the money just keeps score.

(Though some of the commenters still seem to be confusing the dollar bill with the dollar. The paper is just a receipt for dollars. The entity that creates a note is allowed to destroy it. The Federal Reserve can destroy Federal Reserve Notes. The Treasury, when it collects taxes, still needs to pass them on to the Federal Reserve Bank, the final accountant, so they are not going to destroy them when taxes are paid in cash. I mean they can destroy them but then they won’t count, just like if you destroy a $20 bill, you won’t have $20 anymore.)

J.D. Alt interesting discussion; however, it’s off topic. You wrote about “framing” but most of the posts have nothing to do about “framing” they are about “economics.

Several years ago I met some Union guys at a street fair and we were talking about “Chat Groups of 60’s Radicals” one of them claimed that every time the group began talking in concrete terms about doing something to reconstitute tthe group another person changed the topic and they went off on a Tangent.

Could be somebody or some bodies on this site doesn’t want better FRAMING for MMT .

WHAT IS. POSSIBIlITY THAT THERE ARE PETERSON SHILLS COMENTING ON THIS SITE OR IS IT JUST THAT PEOPLE WOULD RATHER DISCUSS THEN MOVE THE ISSUE ?

Well, the problem with that is that nobody will understand what you mean, if you don’t use the same words with the same meanings that they understand. You can be like Humpty Dumpty and say that a word means whatever you choose it to mean, but you won’t be communicating well.

The points to make about the amount of outstanding bonds of a monetarily sovereign government (its “debt”) are that there is no operational limit to it, and indeed no need for the government to issue them in order to deficit spend. Nearly all governments do so nearly all of the time, but that is merely a holdover from bygone days when we had a different monetary system. Once people realize that, they will stop fretting about the size of it, and the word you use for it won’t matter.

Thanks Yuu,
Had the same discussion with some military operations people. They listened, said they understood, and simply replied:

“You’re going nowhere until you create a glossary of new terms allowing coherent discussion to proceed. You can’t prepare coherent operations when there is such high margin of error in interpreting statements.”

I really don’t see much difference between government spending in a monetarily sovereign nation and spending by taxation in a monetarily constrained nation. Both are essentially redistributions of real resources and both are constrained by real resource production (spending only works of there is something real to buy). Tax funded government spending takes spending power (which amounts to control over) real resources from the private sector and puts them in the hands of the government sector. Deficit spending puts real assets in the hands of the government sector, and financial assets in the hands of the private sector, but ceteris Paribus there is less to buy. Im the end, with either model of government spending there is less real value in the real economy. Certainly real resources are the meat of the sandwich, while financial assets are simply means to an end (the end being command over real things). At the end of the day you are back to the same ye olde debate over who uses real resources more efficiently the central command economy or decentralized private actors and groups subject to the laws of supply and demand… I almost feel that government deficit spending is worse because it creates the illusion that I am getting richer because I have more financial assets (money) but less to buy with it… Where as taxes create a greater consciousness raising experience amongst the people as to what their money is being spent on… For example it is easier to fund a spurious war using deficit spending then by taxation… Just my thoughts. Comments appreciated.

The difference is that in times such as now, the monetarily sovereign government can continue to deficit spend so as to maintain some level of demand, while there is a surplus of real resources available, and the non-monetarily sovereign government cannot, it is limited by its ability to tax or borrow. What you describe would happen at full employment, but then government deficits would need to be much smaller, just enough to offset leakages to imports or private savings.

It is true that all government spending moves real resources from the private sector to the public.

John, I am not an economist but your last sentence “. It is true that all government spending moves real resources from the private sector to the public.” doesn’t seem consistent with what Warren Mosler, Stephanie Kelton and Randy Wray are saying can you explain this seeming discrepancy .

Confiscation is involved in the taxing side of government. Even under MMT, there would come a time (at full employment) when government must tax (incrementally) in order to spend (incrementally) without causing a problem. I guess in that case you could say the transfer was confiscatory, but it doesn’t describe our current situation.

“John, I am not an economist but your last sentence “. It is true that all government spending moves real resources from the private sector to the public.” doesn’t seem consistent with what Warren Mosler, Stephanie Kelton and Randy Wray are saying can you explain this seeming discrepancy . Thanks Charles”

Ok, Money is created (leaving the details out). The new money then finds its way to the private sector (as MMTr’s repeatedly state in so many words: ‘pay off the deficit and ceteris paribus you have eliminated money from the private sector’). But if money is ultimately coming from government deficit spending, and the government is doing the spending then it is necessarily taking control of, and directing resources. So my question would be, how do Mosler, Kelton and Wray propose that spending does not put resources at the direction of government instead of private groups. Thank you,

“all government spending moves real resources from the private sector to the public”

That’s a ridiculous statement.
Private spending reflects a range of initiative, from individual up to the largest sub-national but still nationally registered entities.

Public spending reflects any collective initiative that sub-national-pubic entities don’t take on. Note that that can include anything from a small, incorporated town, up to the actions of a US state, territory or protectorate.

It would be nice to construct for yourself a table or graft of the range of projects that OUR culture’s “private” & “public” entites have taken on. There is quite a bit of overlap, but also some clear separation.

I have no idea what you understood by that statement, but what it means is just that when government buys something from the private sector, the ownership of that thing, the “real resource”, is transferred from the private sector to the public sector (government). It could be a helicopter, some other tangible asset, or someone’s labor. It used to be in the private sector, and because government bought it, it now belongs to government, and will be used for the public good.

It’s WHY government spends, in order to divert resources from private purposes to the public purpose.

Could you explain to me (in a different way) why the statement “all government spending moves real resources from the private sector to the public” is ridiculous? I couldn’t quite follow your reasoning, but would like to know more…
Thanks,
Lyndon

?? I’m at a loss here. First thought is that public spending won WWII. Did that transfer real resources from the private sector to the public sector?

If you don’t grasp the concept of return-on-coordination, you’ll never see that any group initiative, whether private or public, can CREATE additional resources for everyone. Can you think of any other way to express that?

Energy of activation in chemistry comes to mind. There are other examples where the return margin outstrips the investment. Then it’s a question of how the extra returns are distributed, not whether they exist. Google “dynamic value” vs “static value.” Another example: the different options & niches accessible to army ants vs snails. Which would you rather be? The reason members elect to develop social species is exactly because the indirect returns on coordinated efforts outstrip – by orders of magnitude – anything available through personal efforts alone. So it’s never a question of group initiative taking something from the members. Rather, it’s a question of group coordination compounding the resources otherwise accessible to the “private” members.

“WWII. Did that transfer real resources from the private sector to the public sector?”

Yes, that’s a perfect example. Government hired millions of soldiers, transferring their labor (the real resource) from the private sector to the public. They also bought hundreds of ships and thousands of rifles, transferring those real resources from the private sector to the public. It’s much simpler than you make it out to be.

Lord have mercy! The dynamic return to the private sector from that organized action was far in excess of the static assets mobilized. What part of real margin don’t you understand?

The altered standing of the USA, from the middle ranks in 1939 to undisputed sole superpower by 1945 is NOT reflected in currency asset figures. The std of living in the USA was better by end of the war, not worse.

“The altered standing of the USA, from the middle ranks in 1939 to undisputed sole superpower by 1945 is NOT reflected in currency asset figures. The std of living in the USA was better by end of the war, not worse.”
Are you saying that war (itself) is good for the standard of living? Or are you referring to an underlying factor also present during war that caused improvements in the standard of living?

I don’t know what 1945 you mean. I think the Soviet Union would have disputed the “sole superpower” status.

Anyway, regardless of what good is done by the transfer, or what the return is down the road, it is a transfer. Without the government having spent the money to buy the thing, the thing would haave remained in the private sector. Government spends in order to acquire the things it needs. Acquiring things transfers their ownership. Then the transaction is done. What happens later, happens later. It is not a complicated analysis, just a simple statement of fact.

I think I’m understanding now. Are you saying that individuals can profit from cooperation (for example: cooperation to mutual benefit)? Another example: there are some things that 10 men can do in an hour, that one man will never do in 10 hours (i.e.:the Amish raising a barn).

But isn’t the coordinaton problem precisely what the law of supply and demand in the ‘free market’ is supposed to sort out? Aren’t we now back to the old (and of course slightly caricatured) debate about what better coordinates resource use: Centralized government edict or decentralized units working in under supply and demand?
Thanks,
Lyndon

This is an unusual definition of government… as most people distinguish along the ‘private/public’ sector lines. Please correct me if I am wrong, but your definition seems analogous to pantheistic doctrine where god is defined as everything, which (for all practical purposes) effectively defines god out of existence. Or perhaps you are defining government as everything that produces net benefit in society?

In a bureaucracy, the performance of any operation is not, in itself, evidence of its necessity. In normal times the Fed and Treasury work closely together to coordinate deposits to the Treasury account and sale or purchase of bonds to adjust reserve balances for the reasons I stated. Recently, the Fed’s purchase of Treasuries has caused excess reserves to skyrocket, so the careful coordination is not necessary. As a matter of law the treasury must continue to sell bonds to match deficits, but that is not an economic necessity as excess reserves need not be drained under current circumstances of consistently high excess reserves.
I understand your statement of actual operations, which were necessary under gold-standard rules, but remain remain unconvinced that they do anything other than manage reserve balances.

You are clearly attacking a straw man. I repeat, the Treasury can spend when it wishes to spend, because all the other players will fall into line. Which they will, and always have. Please provide the counterfactual to this argument.

Robert, thanks for your reference. I realize that the Fed is currently paying IOR at 0.25% that is regarded as Zero Interest Rate Policy and is expected to continue well into 2014. However, it is not clear that the Fed will continue IOR in the future. For some time IOR will be easier than unwinding the present position of high reserves.

The Fed could provide those safe interest bearing assets on its own. The Fed is a bank after all, and there is a public purpose served by providing people with a secure place to park their dollar assets, and probably in providing them with modest and reliable interest payments for doing so.

But I think it would be an improvement to get the Treasury out of this business. That would help eliminate the public perception that the government needs to borrow in order to run a deficit. It doesn’t. We could institute a variety of alternative systems under which the Treasury can simply spend more than it receives, with the Fed clearing all the checks. In doing so, the Fed wouldn’t offer credit to the Treasury in terms of a negative balance to the account that had to be repaid. It would simply make the payment and enter it as a liability on its own balance sheet, the same way that it does when it buys a security on the open market or pays interest on reserves. The Treasury deficit then becomes a direct transmission mechanism for monetary expansion, and we are not relying entirely on the central bank system and commercial bank credit to add monetary assets to the economy.